BG Exploration & Production India Ltd., Mumbai V. DCIT, International Taxation, Dehradun

ITA 6791/DEL/2017

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 6832 (ITAT-DELHI)
• Duration Of Justice: 8 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-07-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2012-2013
• Appeal Filed On: 10-11-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: H K CHAUDHARY
• Keywords: Depreciation; Transfer pricing; Business expenditure; Opportunity of being heard; International transaction; Rule of consistency; Additional depreciation; Wholly owned subsidiary; Bad and doubtful debts; Commercial expediency; Revised return; Revenue expenditure; Capital expenditure
• Section: 234B; 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-2 : NEW DELHI) BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.6791/DEL./2017 (ASSESSMENT YEAR : 2012-13) M/S. BG EXPLORATION & PRODUCTION VS. DCIT, INDIA LIMITED, INTERNATIONAL TAXATION, LAKE BOULEVARD ROAD, DEHRADUN. HIRANANDANI BUSINESS PARK, POWAI, MUMBAI 400 076. (PAN : AAACE4569K) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI AJAY VOHRA, SENIOR ADVOCATE SHRI SAHIL SHARMA, CA REVENUE BY : SHRI H.K. CHAUDHARY, CIT DR DATE OF HEARING : 19.04.2018 DATE OF ORDER : 17.07.2018 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : APPELLANT, M/S. BG EXPLORATION & PRODUCTION INDIA P VT. LTD. (FOR SHORT THE TAXPAYER), BY FILING THE PRES ENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 30.10.2017, P ASSED BY THE AO UNDER SECTION 144C READ WITH SECTION 143 (3) OF THE INCOME-TAX ACT, 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2012-13 IN ITA NO.6791/DEL./2017 2 CONSONANCE WITH THE ORDERS PASSED BY THE LD. DRP/TP O ON THE GROUNDS INTER ALIA THAT :- GROUND NO.1: ERRONEOUS REJECTION OF TRANSACTIONAL NET MARGIN METHOD ('TNMM') AND SELECTION OF COMPARABLE UNCONTROLLED PRICE ('CUP') METHOD 1.1 THE LEARNED AO I DRP I TRANSFER PRICING OFFICE R ('TPO') HAVE ERRED IN LAW AND ON FACTS BY DISREGARD ING THE ECONOMIC ANALYSIS CONDUCTED BY THE APPELLANT, FOR DETERMINATION OF THE ARM'S LENGTH PRICE ('ALP') BY APPLICATION OF TNMM ON AN AGGREGATED BASIS AND FURT HER, ERRED IN APPLYING CUP METHOD GROUND NO.2: WITHOUT PREJUDICE THAT TNMM SHOULD BE SELECTED, LEARNED AO / DRP / TPO APPLIED CUP METHOD IN AN ERRONEOUS MANNER 2.1 WITHOUT PREJUDICE THAT TNMM SHOULD BE SELECTED AS THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE TRANSACTIONS PERTAINING TO INTRA-GROUP SERVICES, TH E LEARNED AO / DRP / TPO HAVE ERRONEOUSLY SELECTED CUP METHOD AND HAVE APPLIED THE SAME IN AN ERRONEOUS MANNER BY CONSIDERING THE AMOUNT APPROVED BY THE JOINT VENTUR E ('N') PARTNER AS CUP. GROUND NO.3: THE LEARNED DRP/AO/TPO ERRED IN COMPUTING THE TP ADJUSTMENT OF INR 2,619,486,354 FO R INTRA-GROUP SERVICES EVEN THOUGH THE LEARNED DRP HA D UPHELD THE APPLICATION OF CUP METHOD AS PER WHICH T HE TP ADJUSTMENT COMPUTED BY THE TPO WAS ONLY INR 2,400,433,920. 3.1 WITHOUT PREJUDICE TO THE ASSESSEE'S CONTENTION S, THE TRANSFER PRICING ADJUSTMENT MADE BY THE LD. AO/DRP/ TPO SHOULD BE LIMITED TO THE VALUE OF INTERNATIONAL TRA NSACTIONS AND CANNOT EXCEED INR 240 CRORES AS PER THE ALP DETERMINED BY THE LD. TPO UNDER THE CUP METHOD WHIC H WAS UPHELD BY HON'BLE DRP GROUND NO.4: ERRONEOUSLY DISREGARDED THE DIRECTIONS OF THE HON'BLE DRP FOR AY 2009-10 AND AY 2010-11 4.1 THE LEARNED AO I DRP I TPO ERRED IN DISREGARDI NG THE DIRECTIONS ISSUED BY THE HON'BLE DRP IN THE CAS E OF THE ITA NO.6791/DEL./2017 3 APPELLANT FOR THE PRIOR YEARS I.E. AY 2009-10 AND A Y 2010- 11 (WHICH HAVE ALSO BEEN AFFIRMED BY HON'BLE ITAT) EVEN THOUGH THE FACTS AND CIRCUMSTANCES OF ITS CASE AND THE BUSINESS MODEL OF THE APPELLANT CONTINUED TO REMAIN THE SAME. GROUND NO.5: ERRONEOUSLY QUESTIONING OF COMMERCIAL EXPEDIENCY OF THE APPELLANT 5.1 THE LEARNED AO I DRP I TPO ERRED IN LAW AND ON FACTS BY QUESTIONING THE COMMERCIAL EXPEDIENCY OF T HE APPELLANT IN AVAILING THE INTRA-GROUP SERVICES FROM ITS ASSOCIATED ENTERPRISE ('AE') AND IN CHANGING FROM F LOATING INTEREST RATE TO FIXED INTEREST RATE ON THE EXTERNA L COMMERCIAL BORROWING TAKEN FROM ITS AE. GROUND NO.6: ERRONEOUS APPLICATION OF CUP FOR DETERMINING ARM'S LENGTH INTEREST RATE 6.1 THE LEARNED AO I DRP I TPO ERRED IN MAKING AN UPWARD ADJUSTMENT OF INR 739,673,740 TO THE TOTAL I NCOME OF THE APPELLANT BY ERRONEOUSLY APPLYING CUP METHOD FOR DETERMINATION OF ARM'S LENGTH INTEREST RATE ON THE EXTERNAL COMMERCIAL BORROWING ('ECB') TAKEN FROM ITS AE. 6.2 THE LEARNED DRP ERRED IN UPHOLDING THE ERRONEO US APPROACH OF THE LD. AOI TPO TO COMPUTE MORE THAN ON E ARM'S LENGTH PRICE FOR THE SAME INTERNATIONAL TRANS ACTION BY APPLYING MULTIPLE APPROACHES. GROUND NO.7: DOUBLE ADDITION VIS-A-VIS ALLEGED ARM' S LENGTH RATE FOR INTEREST. 7.1 WITHOUT PREJUDICE TO THE FACT THAT LEARNED TPO / DRP ERRONEOUSLY APPLIED THE CUP METHOD FOR DETERMINING THE ARM'S LENGTH RATE FOR INTEREST PAYMENT, THE LEARNED AO FURTHER ERRED IN GROSSLY MISINTERPRETING THE DIRECT IONS / ORDER OF THE HON'BLE DRPI TPO AND ERRONEOUSLY ADDED THE TRANSFER PRICING ADJUSTMENT TWICE. THE LD. AO HAS E RRED BY CONSIDERING THE AMOUNT OF PRIMARY ADJUSTMENT OF INR 739,673,740 AS WELL AS THE ADJUSTMENT OF INR 416,11 7,762 WHICH WAS COMPUTED BY TPO AS AN ALTERNATIVE APPROAC H ON A WITHOUT PREJUDICE BASIS, WHILE COMPUTING THE TOTA L INCOME OF THE APPELLANT IN THE FINAL ASSESSMENT ORDER. ITA NO.6791/DEL./2017 4 GROUND NO.8: ERRONEOUS DISALLOWANCE OF PAYMENT MADE TOWARDS INTRA-GROUP SERVICES BY APPELLANT TO ITS AE 8.1 THE LEARNED AO / DRP / TPO GROSSLY ERRED IN LA W AND ON FACTS BY MAKING AN UPWARD TRANSFER PRICING ADJUSTMENT OF INR 3,832,483,013 IN TOTAL TOWARDS INTERNATIONAL TRANSACTIONS PERTAINING TO PAYMENT OF MANAGEMENT SERVICE AND UNIT CHARGES, 1M CHARGES, GE NERAL AND ADMINISTRATION EXPENSES AND PAYROLL EXPENSES TO ITS AE. GROUND NO.9: ERRONEOUS DISREGARDING MULTIPLE YEAR D ATA 9.1 THE LEARNED AO / DRP / TPO GROSSLY ERRED IN ERRONEOUSLY REJECTING MULTIPLE YEAR DATA USED BY TH E APPELLANT IN COMPUTING THE ALP. GROUND NO. 10: PROCEEDINGS BARRED BY LIMITATION 10.1 THE ORDER FOR THE ASSESSMENT YEAR 2012-13 IS BAD IN LAW AND IS LIABLE TO BE QUASHED HAVING REGARD TO TH E STATUTORY TIME LIMIT PRESCRIBED UNDER THE SECTION 1 53 OF THE ACT READ WITH EXPLANATION 1 TO SECTION 153(4) OF TH E ACT. GROUND NO. 11: DISALLOWANCE OF BRANCH OFFICE EXPEND ITURE 11.1 THE LEARNED AO / DRP ERRED IN LAW AND IN FACT S IN DISALLOWING THE BRANCH OFFICE EXPENDITURE OF RS.40,70,92,375 BY TREATING IT AS PRE-OPERATIVE IN NATURE. 11.2 THE LEARNED AO / DRP ERRED IN NOT APPRECIATING THAT THE SAID EXPENDITURE WAS INCURRED WHOLLY AND EXCLUS IVELY FOR THE PURPOSE OF THE APPELLANT'S BUSINESS IN INDI A. 11.3 THE LEARNED AO ERRED IN LAW AND IN FACTS IN OBSERVING THAT THE PAYMENTS MADE WHICH ARE INCLUDED IN THE BRANCH OFFICE EXPENDITURE, WERE LIABLE TO BE DISALL OWED UNDER SECTION 40(A)(IA) OF THE ACT. 11.4 THE LEARNED AO ERRED IN NOT NOTING THAT THE CL AIM REGARDING DOUBLE DISALLOWANCE OF RS.52,39,273, BEIN G DEPRECIATION INCLUDED IN BRANCH OFFICE EXPENDITURE, WAS ALREADY RECTIFIED BY THE LEARNED AO IN ITS ORDER DA TED 21 FEBRUARY 2017. GROUND NO. 12: DISALLOWANCE OF EXPENDITURE INCURRED ON NON-PRODUCING PRODUCTION SHARING CONTRACTS ('PSCS') ITA NO.6791/DEL./2017 5 12.1 THE LEARNED AO / DRP ERRED IN LAW AND IN FACTS IN DISALLOWING THE EXPENDITURE OF RS.1,96,49,04,712 IN CURRED ON NON-PRODUCING PSCS. 12.2 WITHOUT PREJUDICE, THE AO / DRP ERRED IN INCL UDING AN AMOUNT OF RS.50,30,71,918 IN THE DISALLOWANCE WH ICH WAS DISALLOWED BY THE DRP IN AY 2009-10 WITH A DIRE CTION TO BE ALLOWED AS A DEDUCTION IN AY 2012-13. GROUND NO. 13: DISALLOWANCE OF LOSS ON TRANSPORTATI ON 13.1 THE LEARNED AO ERRED IN DISALLOWING LOSS ON TRANSPORTATION OF CONDENSATE ON THE GROUND THAT THE EXPENDITURE CANNOT BE ALLOWED ON THE BASIS OF THE P ROVISIONS MADE BY THE ASSESSEE. 13.2 THE LEARNED DRP ERRED IN CONCLUDING THAT THE DISALLOWANCE OF LOSS ON TRANSPORTATION WAS RECTIFIE D BY THE LEARNED AO VIDE ORDER DATED 21 FEBRUARY 2017. 13.3 WITHOUT PREJUDICE, THE LEARNED AO / DRP ERRED IN NOT ALLOWING THE LOSS ON TRANSPORTATION OF CONDENSATE A T 1.7% DETERMINED BY AN EXPERT IN THE YEAR OF CREATION OF PROVISION OR IN THE YEAR IN WHICH SUCH LOSS WAS DETERMINED (I .E. AY 2016-17). 13.4 WITHOUT PREJUDICE, THE LEARNED AO / DRP ERRED IN NOT NOTING THAT THE AMOUNT OF PROVISION REVERSED IN FY 2015-16 OUGHT NOT TO BE TAXED IN AY 2016-17. GROUND NO. 14: ADDITION OF PROVISIONS WRITTEN BACK 14.1 THE LEARNED AO / DRP ERRED IN LAW AND IN FACTS IN NOT ALLOWING THE CLAIM OF NON-TAXABILITY OF PROVISI ONS WRITTEN BACK OF RS.20,67,360. GROUND NO. 15: DISALLOWANCE OF EXCHANGE LOSS ON INT EREST ON BG ASIA PACIFIC PTE. LIMITED ('BGAP') LOAN 15.1 THE LEARNED AO ERRED IN LAW AND IN FACTS IN DISALLOWING EXCHANGE LOSS OF RS.5,31,59,102, DESPIT E ACKNOWLEDGING THE LOSS TO BE ON REVENUE ACCOUNT BEI NG INTEREST ON BGAP LOAN. GROUND NO. 16: DISALLOWANCE OF HEAD OFFICE EXPENDIT URE ITA NO.6791/DEL./2017 6 16.1 THE LEARNED AO / DRP ERRED IN LAW AND IN FACT S IN APPLYING THE PROVISIONS OF SECTION 44C OF THE ACT T O PAYMENTS MADE TO BG INTERNATIONAL LIMITED. 16.2 WITHOUT PREJUDICE, THE AO HAS ERRED IN COMPUT ING ALLOWANCE UNDER SECTION 44C WITH RESPECT TO THE RET URNED INCOME AND NOT INCOME ASSESSED. GROUND NO. 17: DISALLOWANCE OF INVENTORY WRITTEN OF F 17.1 THE LEARNED AO ERRED IN LAW AND IN FACTS IN DISALLOWING INVENTORY WRITTEN OFF OF RS.1,54,16,938 ON THE BASIS THAT THE APPELLANT SUBMITTED ONLY INTERNAL DO CUMENTS WHICH DO NOT SUFFICE FOR ALLOWANCE OF EXPENDITURE. 17.2 THE LEARNED AO / DRP ERRED IN NOT APPRECIATING THAT AMOUNT OF OBSOLETE INVENTORY WRITTEN OFF WAS DEBITE D TO THE PROFIT AND LOSS ACCOUNT WHICH HAS BEEN AUDITED BY A N INDEPENDENT AUDITOR. GROUND NO. 18: DISALLOWANCE OF DEPRECIATION AND DEP LETION 18.1 THE LEARNED AO ERRED IN LAW AND IN FACTS IN DISALLOWING DEPRECIATION OF RS.48,70,14,075 BEING T HE DIFFERENCE OF DEPRECIATION AMOUNT BETWEEN THE TAX A UDIT REPORT AND THE COMPUTATION. 18.2 THE LEARNED DRP ERRED IN CONCLUDING THAT THE DISALLOWANCE OF DEPRECIATION OF RS.48,70,14,075 WAS RECTIFIED BY THE LEARNED AO VIDE ORDER DATED 21 FEB RUARY 2017. 18.3 THE LEARNED AO / DRP ERRED IN NOT APPRECIATING THAT THIS DIFFERENCE IS ON ACCOUNT OF DEPRECIATION CLAIM ED ON GLOBAL IT & T EXPENDITURE AND THAT DEPRECIATION CLA IM ON GLOBAL IT & T EXPENDITURE WAS ALLOWABLE AS HELD BY THE HON'BLE IIAT IN ASSESSEE'S OWN CASE FOR AY 2010-11. 18.4 THE LEARNED AO ERRED IN LAW AND IN FACTS IN DISALLOWING DEPLETION OF RS.3,47,69,091 BEING THE D IFFERENCE OF DEPLETION AMOUNT BETWEEN THE TAX AUDIT REPORT AN D THE COMPUTATION 18.5 THE LEARNED DRP ERRED IN NOT DEALING WITH THE OBJECTION ON DISALLOWANCE OF DEPLETION OF RS.3,47,6 9,091. ITA NO.6791/DEL./2017 7 18.6 THE LEARNED AO / DRP ERRED IN NOT APPRECIATING THAT THIS DIFFERENCE IS ON ACCOUNT OF DIFFERENCE IN OPEN ING WDV OF ASSETS ON FIRST DAY OF THE CAPTIONED ASSESSMENT YEAR WHICH WAS ACCEPTED BY THE REVENUE AUTHORITIES IN EARLIER YEARS. GROUND NO. 19: ADDITIONAL DEPRECIATION 19.1 THE LEARNED AO ERRED IN DISALLOWING ADDITIONAL DEPRECIATION OFRS.88,90,051 CLAIMED BY THE APPELLAN T DURING THE COURSE OF ASSESSMENT PROCEEDINGS, NOT NO TING THAT THE MISTAKE APPARENT FROM RECORD WAS ALREADY R ECTIFIED BY THE LEARNED AO IN ITS ORDER DATED 21 FEBRUARY 20 17. 19.2 THE LEARNED AO / DRP ERRED IN NOT GRANTING ADDITIONAL DEPRECIATION OF RS.88,90,051 UNDER SECTI ON 32(L)(IIA) OF THE ACT ON THE NEW PLANT AND MACHINER Y OF RS.4,44,50,253 PURCHASED AND PUT TO USE BY THE APPE LLANT DURING THE YEAR. GROUND NO. 20: DISALLOWANCE OF INTEREST INCURRED ON LOAN TAKEN FROM BGAP 20.1 THE LEARNED AO / DRP ERRED IN LAW AND IN FACT S IN DISALLOWING INTEREST OF RS.2,31,62,145, NOT CLAIMED AS A DEDUCTION. GROUND NO. 21: ADDITION ON ACCOUNT OF DIFFERENCE IN REVENUE AS PER FORM 26AS AND PROFIT AND LOSS ACCOUN T 21.1 THE LEARNED AO / DRP ERRED IN MAKING AN ADDITI ON OFRS.63,65,958, BEING THE DIFFERENCE OF REVENUE REC EIVED FROM 0 GC AS REFLECTED IN FORM 26AS AND APPELLANT'S BOOKS, WITHOUT APPRECIATING THAT THE DIFFERENCE IS DUE TO ACCOUNTING TREATMENT AS PRESCRIBED UNDER THE PSC. 21.2 WITHOUT PREJUDICE, THE LEARNED AO / DRP ERRED IN NOT REDUCING THE INCOME BY RS.12,41,30,601 BEING THE DI FFERENCE OF REVENUE FROM IOCL AS OFFERED TO TAX BY THE APPEL LANT VIS- A-VIS THAT APPEARING ON FORM 26AS. GROUND NO.22: VIOLATION OF PRINCIPLES OF NATURAL JU STICE 22.1 THE LEARNED AO / DRP ERRED IN LAW AND IN FACTS , IN IGNORING THE SUBMISSIONS AND THE INFORMATION FURNIS HED BY THE APPELLANT DURING THE ASSESSMENT PROCEEDINGS. ITA NO.6791/DEL./2017 8 GROUND NO. 23: SHORT CREDIT FOR TAX DEDUCTED AT SOU RCE 23.1 THE LEARNED AO ERRED IN NOT GRANTING CREDIT OF TAX DEDUCTED AT SOURCE TO THE EXTENT OF RS.33,53,88,297 . GROUND NO. 24: LEVY OF INTEREST UNDER SECTIONS 234B AND 234C OF THE ACT 24.1 THE LEARNED AO HAS ERRED IN LAW AND IN FACT, I N LEVYING INTEREST UNDER SECTIONS 234B AND 234C OF TH E ACT DISREGARDING THE FACT THAT THE APPELLANT IS A NON-R ESIDENT WHOSE INCOME IS SUBJECT TO TAX DEDUCTION AT SOURCE. GROUND NO. 25: GENERAL 25.1 THE APPELLANT SUBMITS THAT THE AO, TPO AND DRP HAVE ERRED IN ARRIVING VARIOUS UNWARRANTED AND ERRO NEOUS CONCLUSIONS UNSUPPORTED BY ANY RELEVANT MATERIAL IN DECIDING THE CASE. 25.2 THE AO ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT. 25.3 THE APPELLANT SUBMITS THAT EACH GROUNDS OF APP EAL ARE WITHOUT PREJUDICE TO ONE ANOTHER. 2. BRIEFLY STATED THE FACTS NECESSARY TO ADJUDICATE THE ISSUES IN CONTROVERSY ARE : M/S. BG EXPLORATION AND PRODUCTIO N INDIA LIMITED, THE TAXPAYER IS A COMPANY INCORPORATED WIT H LIMITED LIABILITY IN THE CAYMAN ISLANDS AND IS INTO THE BUS INESS OF PROSPECTING, EXPLORATION AND PRODUCTION OF CRUDE OI L AND NATURAL GAS, BEING 100% SUBSIDIARY OF BG MUMBAI HOLDINGS LI MITED (A COMPANY INCORPORATED IN MAURITIUS) HAVING ITS PRO JECT OFFICE IN INDIA FOR UNDERTAKING THE INDIAN OPERATIONS. BG IN TERNATIONAL LIMITED (BGIL) IS A COMPANY INCORPORATED IN THE UNI TED KINGDOM ITA NO.6791/DEL./2017 9 WITH MORE THAN 40 YEARS OF EXPERIENCE AND TECHNICAL EXPERTISE RELATING TO EXPLORATION AND PRODUCTION ACTIVITIES I N THE OIL AND GAS SECTOR. 3. THE TAXPAYER HAS ENTERED INTO PRODUCTION SHARING CONTRACTS (PSCS) AND JOINT OPERATING AGREEMENTS QUA SIX PROJE CTS INCLUDING PANNA/MUKTA AND MID & SOUTH TAPTI OIL AND GAS FIELD S AS A PARTNER OF THE RESPECTIVE UNINCORPORATED JOINT VENTURES FOR PROSPECTING, EXPLORING AND PRODUCING OIL AND GAS FROM THE CONTRA CTED AREAS. IN ORDER TO EXECUTE SUCH PSCS CARRIED OUT ITS OBLIGATI ONS UNDER THE PSCS AS A JOINT OPERATORS, THE TAXPAYER HAS SET UP A PROJECT OFFICE IN INDIA. DURING THE YEAR UNDER ASSESSMENT, THE TA XPAYER HAS ENTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS AS SOCIATED ENTERPRISES (AE) AS UNDER :- TYPE OF INTERNATIONAL TRANSACTION VALUE (RS.) METHO D MANAGEMENT SERVICE UNIT CHARGES 1,380,372,188 TNMM IM RECHARGE AND TIME WRITING CHARGES 712,561,730 TNMM REIMBURSEMENT OF EXPENSES 2,829,098 TNMM PAYROLL EXPENSES 331,112,844 TNMM REIMBURSEMENT OF EXPENSES 171,954,384 TNMM REIMBURSEMENT OF EXPENSES 1,076,630 TNMM REIMBURSEMENT OF EXPENSES 229,606 TNMM PROVISION OF SUPPORT SERVICES 19,349,874 TNMM INTEREST PAID ON LOAN 1,849,141,197 OTHER METHOD RECEIPT OF INTEREST ON OUTSTANDING RECEIVABLES 67,288,875 - RECOVERY OF EXPENSES 462,158,369 - ITA NO.6791/DEL./2017 10 4. THE TAXPAYER IN ORDER TO BENCHMARK ITS INTERNATI ONAL TRANSACTION QUA INTRA-GROUP SERVICES USED TRANSACTI ONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD (MAM) SHOWING EARNING MARGIN OF 24.67%. THE TAXPAYER HAS CLUBBED TOGETHER ALL THE INTERNATIONAL TRANSACTIONS RELATIN G TO INTRA GROUP SERVICES AND BENCHMARKED THE SAME UNDER TNMM. THE TAXPAYER ALSO USED TNMM IN RELATION TO BUSINESS SUPPORT SERV ICES SHOWING MARGIN OF COST PLUS 12%. THE TAXPAYER BENCHMARKED THE PAYMENT OF INTEREST BY OBTAINING QUOTATIONS CORROBORATED WI TH INDEPENDENT COMPANIES COMPARABLE PAYMENT OF INTEREST ON ECBS. HOWEVER, TRANSFER PRICING OFFICER (TPO) REJECTED THE METHOD ADOPTED BY THE TAXPAYER AND USED CUP AS THE MAM IN THE INTRA GROUP SERVICES. DECLINING THE CONTENTIONS RAISED BY THE TAXPAYER, T PO PROCEEDED TO PROPOSE TP ADJUSTMENT QUA INTERNATIONAL TRANSACT IONS UNDERTAKEN BY THE TAXPAYER AS UNDER :- 27. ON THE BASIS OF DISCUSSION MADE ABOVE THE TOT AL ADJUSTMENTS PROPOSED IN RESPECT OF INTERNATIONAL TR ANSACTIONS UNDER TAKEN BY THE TAXPAYER ARE AS GIVEN BELOW: S.NO. NATURE OF INTERNATIONAL TRANSACTION ADJUSTMENT U/S 92CA (INR) 1 INTRA GROUP SERVICES* 3,832,483,013 2 INTEREST PAYMENT 739,673,740 TOTAL 457,21,56,753 THE ABOVE SHORTFALL OF RS.3,832,483,013 HAS BEEN PROPOSED AS AN ADJUSTMENT ON WITHOUT PREJUDICE BASIS TO THE PRI CE SHOWN BY THE TAXPAYER IN ITS BOOKS OF ACCOUNT IN RELATION TO INTRA GROUP ITA NO.6791/DEL./2017 11 SERVICES. SINCE THE ADJUSTMENT AS PER TNMM ANALYSIS WORKS OUT ON THE HIGHER SIDE COMPARED TO ADJUSTMENT OF RS.2,1 00,433,920 PROPOSED UNDER CUP IN THE EARLIER PART OF THE ORDER , AN ADJUSTMENT OF RS.3,832,483,013 HAS BEEN PROPOSED U/ S 92CA TO PROTECT THE INTEREST OF REVENUE. IT MAY FURTHER BE MENTIONED THAT CUP ANALYSIS HAS BEEN CARRIED OUT FOR THE SAKE OF C ONSISTENCY WHEREIN AN ADJUSTMENT OF RS.2,400,433,920 HAS BEEN PROPOSED. 28. THE ASSESSING OFFICER WILL ACCORDINGLY ENHANCE THE INCOME OF THE TAXPAYER BY RS.457,21,56,753/- THIS S HALL BE TREATED AS THE CUMULATIVE ADJUSTMENT U/S 92CA. NO A DVERSE INFERENCE IS DRAWN IN RESPECT OF THE OTHER INTERNAT IONAL TRANSACTIONS UNDERTAKEN BY THE TAXPAYER DURING THE F.Y.2011-12. THE TAXPAYER WAS AFFORDED REASONABLE OPPORTUNITY OF BEING HEARD, AS MENTIONED ON PAGE 1 OF THIS ORDER. THE AS SESSING OFFICER MAY EXAMINE ISSUE OF INITIATION OF PENALTY U/S 271(1)(C) OF THE ACT IN ACCORDANCE WITH EXPLANATION 7 OF THE SAM E. 5. ASSESSEE CARRIED THE MATTER BEFORE THE LD. DRP B Y WAY OF FILING OBJECTIONS WHO HAS EXTENDED PART RELIEF. FE ELING AGGRIEVED, THE TAXPAYER HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING THE PRESENT APPEAL. 6. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. 7. UNDISPUTEDLY, THE TPO HAS REJECTED THE TNMM AS M AM USED BY THE TAXPAYER TO BENCHMARK ITS INTERNATIONAL TRANSACTIONS QUA INTRA GROUP SERVICES AND BUSINESS SUPPORT SERVI CES. IT IS ALSO NOT IN DISPUTE THAT THE OPERATIONS OF THE TAXPAYER IN INDIA ARE BEING CARRIED OUT UNDER PSC WHICH GENERATE REVENUE FOR TH E TAXPAYER. IT ITA NO.6791/DEL./2017 12 IS ALSO NOT IN DISPUTE THAT THE TAXPAYER HAS ENTERE D INTO 6 PSC WITH PERMISSION FROM THE GOVERNMENT OF INDIA WHICH ARE A S UNDER :- S.NO. NAME 1 PANNA MUKTA OIL FIELD 2 SOUTH TAPTI OIL FIELD AREA 3 KG-OSN 2004/1 CONTRACT AREA 4 KG-DWN-2002/2 CONTRACT AREA 5 MN-DWN-2002/2 CONTRACT AREA 6 KG-DWN-2009/1 8. IT IS ALSO NOT IN DISPUTE THAT THE COMMERCIAL PR ODUCTION HAS ONLY STARTED IN FIRST 2 PSC I.E. PANNA MUKTA OIL FI ELD AND SOUTH TAPTI OIL FIELD AREA. IT IS ALSO NOT IN DISPUTE TH AT THE TAXPAYER HAS AGGREGATED ALL TRANSACTIONS AND USED TNMM AT ENTITY LEVEL AND FOUND ITS INTERNATIONAL TRANSACTIONS AT ARMS LENGT H. IT IS ALSO NOT IN DISPUTE THAT AFTER DIRECTIONS ISSUED BY THE DRP, PR OPOSED ADJUSTMENT OF RS.457,21,56,753/- BY THE TPO HAS BEE N REVISED TO RS.3,359,160,094/- WHICH IS AS UNDER :- NATURE OF INTERNATIONAL TRANSACTIONS ADJUSTMENT U/S 92CA (INR) ADJUSTMENT AFTER THE DIRECTION OF DRP INTRA GROUP SERVICES 3,832,483,013 2,619,486,354 INTEREST PAYMENT 739,673,740 739,673,740 TOTAL 4,572,156,753 3,359,160,094 9. IN THE BACKDROP OF THE AFORESAID FACTS AND CIRCU MSTANCES, ARGUMENTS ADDRESSED BY THE LD. AUTHORIZED REPRESENT ATIVES OF THE ITA NO.6791/DEL./2017 13 PARTIES TO THE APPEAL, THE GROUNDS RAISED BY THE TA XPAYER IMPUGNING ORDER PASSED BY TPO/DRP/AO ARE DISCUSSED AS UNDER. TRANSFER PRICING GROUNDS GROUNDS NO.1, 2, 3, 4, 5, 6 7, 8 & 9 10. PERUSAL OF PARA Z AT PAGE 20 OF IMPUGNED ORDER PASSED BY LD. DRP SHOWS THAT THE LD. DRP HAS DECLINED TO DEAL WIT H THE OBJECTIONS WITH REGARD TO BENCHMARKING THE INTERNAT IONAL TRANSACTIONS UNDER TNMM ON THE GROUND THAT THE TPO HAS DONE BENCHMARKING AS PER TNMM ALSO (ON WITHOUT PREJUDICE BASIS) AND CUP HAS ALREADY BEEN UPHELD BY THE LD. DRP, SO THE BENCHMARKING UNDER THE TNMM BECOMES ACADEMIC IN NATURE. 11. UNDISPUTEDLY, THE TAXPAYER HAS ENTERED INTO PSC WITH OIL AND NATURAL GAS CORPORATION LIMITED (ONGC) AND RELI ANCE INDUSTRIES LIMITED (RIL), BEING JOINT VENTURE PARTN ERS AS MANDATED BY GOVERNMENT OF INDIA FOR EXPLORATION AND PRODUCTI ON OF OIL AND GAS HYDROCARBONS IN THE DESIGNATED CONTRACTED FIELD S OF PANNA MUKTA AND MID AND SOUTH TAPTI FIELDS FOR WHICH TAXP AYER BEING A JOINT OPERATOR HAS SET UP A PROJECT OFFICE IN INDIA . IT IS THE CASE OF THE TAXPAYER THAT AS PER APPROVAL GIVEN BY RESERVE BANK OF INDIA ACTIVITIES OF THE BRANCH OFFICE WERE RESTRICTED AS PER ANNEXURE ANNEXED WITH THE APPROVAL AND NO OTHER ACTIVITIES H AVE BEEN CARRIED ITA NO.6791/DEL./2017 14 OUT BY THE TAXPAYER. IT IS ALSO THE CASE OF THE TA XPAYER THAT IT HAS RECEIVED SERVICES AS PER SERVICE AGREEMENT SIGNED W ITH ITS AE HAVING 40 YEARS OF EXPERIENCE RELATING TO EXPLORATI ON AND PRODUCTION ACTIVITIES IN THE OIL AND GAS SECTOR AND BGIL IS HAVING A WIDE POOL OF HIGHLY KNOWLEDGEABLE, TECHNICALLY TRAI NED AND EXPERIENCED STAFF. IT IS ALSO THE CASE OF THE TAXP AYER THAT DURING THE YEAR UNDER ASSESSMENT, THE TAXPAYER AVAILED OF THE SERVICES FROM ITS AE FOR THE PURPOSE OF CARRYING OUT ITS BUSINESS OF PROSPECTING ITS EXPLORATION AND PRODUCTION OF CRUDE OIL AND NATURAL GAS, AS HAS BEEN DISCUSSED BY THE LD. DRP AT PAGES 8 TO 18, AS UNDER :- S.NO. TYPE OF INTRA GROUP SERVICE AMOUNT 1. MANAGEMENT SERVICE UNIT CHARGES 1,380,372,188 2 IM RECHARGE AND TIME WRITING CHARGES 712,561,730 3 PAYROLL EXPENSES 331,112,844 4 REIMBURSEMENT OF EXPENSES 171,954,384 TOTAL AMOUNT 2,596,001,146 12, THE LD. AR FOR THE TAXPAYER CONTENDED THAT THE INTERNATIONAL TRANSACTIONS QUA INTRA GROUP SERVICES RECEIVED BY T HE TAXPAYER WAS REQUIRED TO BE BENCHMARKED BY APPLYING TNMM ON THE GROUND THAT THE TRANSACTION OF INTRA GROUP SERVICES WERE C LOSELY LINKED WITH THE BUSINESS ACTIVITIES OF TAXPAYER QUA EXPLORATION AND PRODUCTION OF OIL AND GAS. 13. THE LD. AR FOR THE TAXPAYER CONTENDED THAT THE ISSUE IN CONTROVERSY HAS ALREADY BEEN DECIDED IN FAVOUR OF T HE TAXPAYER IN ITA NO.6791/DEL./2017 15 ITS OWN CASE FOR AY 2010-11 IN ITA NO.1170/DEL/2015 ORD ER DATED 24.04.2017 . WE HAVE GONE THROUGH THE ORDER (SUPRA) REFERRED TO BY THE LD. AR FOR THE TAXPAYER IN WHICH IDENTICAL ISSUES WERE RAISED AND HAS BEEN DECIDED IN FAVOUR OF THE T AXPAYER BY RETURNING FOLLOWING FINDINGS :- 72. ON THE EXAMINATION OF THE VOLUME AND US DETAI LS SUBMITTED BY THE ASSESSEE. THE LD. DISPUTE RESOLUTI ON PANEL HAS COME TO THE CONCLUSION THAT ASSESSEE HAS RECEIVED T HE SERVICES AND THOSE SERVICES ARE USEFUL SERVICES.. WITH RESPE CT TO THE CLUBBING OF THE TRANSACTION IT WAS HELD THAT WHEN T HE TRANSACTIONS ARE CLOSELY INTERRELATED IT IS BUT NATURAL TO CLUB SUCH TRANSACTION AND BENCHMARKED IT TOGETHER. THE LD. DISPUTE RESOLU TION PANEL AT PAGE NO. 30 31, HAS CONSIDERED THE SUSPECT AND AG REED WITH THE CONTENTION OF THE ASSESSEE THAT INTRAGROUP SERVICES RECEIVED FROM ITS ASSOCIATED ENTERPRISE ARE CLOSELY LINKED TO THE MAIN BUSINESS ACTIVITY OF THE ASSESSEE COMPANY PLACING RELIANCE O N THE US REGULATIONS, OECD REGULATIONS AND OECD DRAFT NOTES ON COMPARABILITY. IN VIEW OF THIS WE DO NOT FIND ANY I NFIRMITY AND NONE WAS POINTED OUT BEFORE US BY THE LD. DEPARTMEN TAL REPRESENTATIVE IN THE ORDER OF THE LD. DISPUTE RESO LUTION PANEL. CONSEQUENTLY, AFTER VERIFYING THAT ASSESSEE HAS DEM ONSTRATED NEED FOR THOSE SERVICES, BENEFIT DERIVED FROM THOSE SERVICES, EVIDENCE OF RECEIPT OF SUCH SERVICES AND SUBMITTING THAT THOSE SERVICES ARE NEITHER DUPLICATIVE IN NATURE AND NOR ARE SHARE HOLDER ACTIVITIES, THE DRP DIRECTED THE LD. TRANSFE R PRICING OFFICER TO DELETE THE ADJUSTMENT PROPOSED WITH RESPECT TO T HE INTRAGROUP SERVICES OF RS. 3329766244/, DESERVES TO BE UPHELD . THE JUDICIAL PRECEDENTS CITED BEFORE US ALSO SUPPORTS THE VIEW T HAT THE NEEDED TEST, THE BENEFIT TEST ARE ALSO REQUIRED TO BE VIEW ED FROM THE PERSPECTIVE OF A BUSINESSPERSON AND NOT FROM THE PE RSPECTIVE OF THE REVENUE. FURTHER, NO EVIDENCES HAVE BEEN LED BE FORE US BY REVENUE STATING THAT THESE SERVICES ARE DUPLICATIVE IN NATURE AND ALSO SERVES ONLY THE INTEREST OF THE SHAREHOLDER. A CCORDING TO THE INFORMATION SUPPLIED BY THE ASSESSEE AND EXAMINED B Y THE LD. DISPUTE RESOLUTION PANEL DOES NOT GIVE ANY SUCH IND ICATION. FURTHER REGARDING NON-SHARING OF THE COST BY THE JO INT-VENTURE PARTNERS WE HAVE GIVEN OUR FINDINGS WHILE DECIDING THE APPEAL OF THE ASSESSEE THAT SUCH AN ACTION OF THE JOINT-VENTU RE PARTNERS CANNOT BE THE REASON TO DETERMINE THE ARMS LENGTH PRICE OF THE SERVICES WHICH IS BEEN RECEIVED BY THE ASSESSEE AT NIL. IN VIEW OF THIS WE UPHOLD THE FINDING OF THE LD. DISPUTE RESOL UTION PANEL HOLDING THAT TRANSACTIONS OF INTRAGROUP SERVICES AR E INTERLINKED, THEREFORE, THEY SHOULD BE BENCHMARKED TOGETHER BY A DOPTING ITA NO.6791/DEL./2017 16 TNMM AS THE MOST APPROPRIATE METHOD , HENCE, DIRECT ING THE LD. TRANSFER PRICING OFFICER TO DELETE THE ADJUSTMENT P ROPOSED OF RS. 3 329766244/. IN THE RESULT GROUND NO. 1 TO 3 OF THE APPEAL OF THE REVENUE ARE DISMISSED. 14. SO, FOLLOWING THE DECISION RENDERED BY THE COOR DINATE BENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2010- 11 (SUPRA), WE DEEM IT NECESSARY TO REMAND THIS ISSUE TO LD. DRP T O DECIDE AFRESH TO BENCHMARK THE INTERNATIONAL TRANSACTIONS UNDERTA KEN BY THE TAXPAYER BY APPLYING THE TNMM AS MAM BY PROVIDING A N OPPORTUNITY OF BEING HEARD TO THE TAXPAYER, IN THE LIGHT OF THE DECISION RENDERED BY THE COORDINATE BENCH OF THE TR IBUNAL IN AY 2010-11. SO, GROUNDS NO.1 TO 9 ARE DETERMINED IN F AVOUR OF THE TAXPAYER FOR STATISTICAL PURPOSES. GROUND NO.10 15. GROUND NO.10 IS DISMISSED HAVING NOT BEEN PRESS ED DURING THE COURSE OF ARGUMENTS. GROUND NO.11 16. AO/DRP HAVE DISALLOWED THE EXPLORATION AND BUSI NESS DEVELOPMENT EXPENSES OF RS.40,70,92,375/- INCURRED BY THE BRANCH OFFICE BY TREATING THE SAME AS PRE-OPERATIVE IN NAT URE. IT IS THE CASE OF THE TAXPAYER THAT IT IS ESTABLISHED ON RECORD TH AT THE BRANCH OFFICE HAS BEEN ESTABLISHED IN INDIA TO CARRY OUT N ECESSARY ITA NO.6791/DEL./2017 17 FUNCTIONS FOR SUSTENANCE OF ITS BUSINESS OF PROSPEC TING, EXPLORATION AND PRODUCTION OF CRUDE OIL AND NATURAL GAS BY IDEN TIFYING THE OPPORTUNITIES. THE TAXPAYER HAS ALSO BROUGHT ON RE CORD THE DETAIL OF COST FOR PURCHASE OF SEISMIC DATA, GENERAL AND A DMINISTRATIVE EXPENSES IN CONNECTION WITH PROPOSED NATIONAL EXPLO RATION LICENSING POLICIES-VIII (NELP-VIII), STAFF COSTS AN D PROJECT MANAGEMENT CONSULTANCY CHARGES ETC. AO DISALLOWED THE EXPENDITURE ON THE GROUND THAT IT IS A PRE-OPERATIV E EXPENDITURE AND CANNOT BE ALLOWED AS BUSINESS EXPENDITURE AND THE T AXPAYER HAS NOT PROVIDED PARTY-WISE DETAILS OF PAYMENT MADE AND NOR THE DETAILS HAVE BEEN PROVIDED AS TO WHETHER TDS COMPLIANCE HAS BEEN MADE OR NOT. 17. THE BUSINESS EXPENDITURE U/S 37 OF THE ACT ARE REQUIRED TO BE ALLOWED SUBJECT TO FULFILLING THE CONDITIONS INTER ALIA THAT THE EXPENSES SHOULD BE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND THAT THE EXPENSES SHOULD BE REVENUE IN NATURE. IT IS NOT IN DISPUTE THAT THE TAXPAYER HAS INCURRED THE EXPENSES IN QUESTION ON COST FOR PURCHASE OF SEISMI C DATA, GENERAL AND ADMINISTRATIVE EXPENSES UNDER THE NELP-VIII AND STAFF COSTS AND MANAGEMENT CONSULTANCY CHARGES, THE BREAK UP/DE TAILS THEREOF HAS BEEN SUBMITTED TO THE AO DURING ASSESSMENT PROC EEDINGS. IT IS ALSO NOT IN DISPUTE THAT AT THE TIME OF INCURRING T HE EXPENSES ITA NO.6791/DEL./2017 18 BUSINESS OF THE TAXPAYER WAS ALREADY RUNNING AND EX PLORATORY EXPENSES ARE NECESSARY TO CARRY OUT ITS BUSINESS IN INDIA WHICH WERE TO BE BASED UPON THE EVALUATION OF PARTICULARS AND TECHNICAL ANALYSIS. 18. COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF ONGC VIDESH LTD. VS. DCIT 37 SOT 97 ALLOWED EXPENSES INCURRED BY THE TAXPAYER ON EXPLORATION, ACQUIRING SEISMIC DATA AND UNDERTAKING FEASIBILITY STATUS FOR PRODUCTION OF CR UDE OIL AND NATURAL GAS U/S 37 (1) OF THE ACT BY RETURNING FOLL OWING FINDINGS :- SECTION 37 (1) OF THE INCOME-TAX ACT, 1961 BUSIN ESS EXPENDITURE ALLOWABILITY OF ASSESSMENT YEAR 200 2-03 WHETHER WHERE ASSESSEE ENGAGED IN BUSINESS OF EXPLO RATION AND PRODUCTION OF HYDROCARBONS, INCURRED EXPENDITURE ON PURCHASE AND EVALUATION OF SEISMIC DATA OF FOREIGN BLOCKS, I T WAS TO BE HELD THAT EXPENDITURE SO INCURRED WAS FOR FURTHERAN CE OF ACTIVITIES UNDERTAKEN BY IT IN NORMAL COURSE OF BUS INESS AND, THEREFORE, SAME WAS TO BE ALLOWED AS BUSINESS EXPEN DITURE HELD, YES. 19. UNDISPUTEDLY, THIS ISSUE HAS COME UP FOR CONSID ERATION BEFORE THE COORDINATE BENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE IN AY 2010-11 (SUPRA) AND HAS BEEN DECIDED IN FAVOUR OF THE TAXPAYER BY RETURNING FOLLOWING FINDINGS :- 56. NOW COMING TO THE CLAIM OF THE DEDUCTION OF E XPENDITURE OF RS.22098 3295/ ON ACCOUNT OF PURCHASE OF SEISMI C DATA AND GENERAL AND ADMINISTRATIVE EXPENSES IN CONNECTION W ITH THE PROPOSED NELP VIII, IT IS SUBMITTED BY THE ASSESSEE THAT THESE WERE THE EXPENSES INCURRED BY THE ASSESSEE WITH RES PECT TO THE OFFERS WHICH WERE INVITED FOR THE 8TH OFFER OF BLOC KS FOR NATIONAL EXPLORATION LICENSING POLICY FOR WHICH THE ASSESSEE HAS TO PURCHASE THE DATA FOR THE BIDDING PURPOSES. THE OTH ER EXPENSES ITA NO.6791/DEL./2017 19 WHICH ARE THE NECESSARY GENERAL AND ADMINISTRATIVE EXPENSES WERE INCURRED FOR PROJECT MANAGEMENT, CONSULTANCY S ERVICES, ETC AND ALSO STAFF COST AND PROJECT MANAGEMENT EXPENSES WERE INCURRED. THESE EXPENSES WERE DISALLOWED BY LD. ASS ESSING OFFICER HOLDING THAT THESE ARE EXPENSES FOR THE FUT URE PROJECTS OF THE ASSESSEE FOR WHICH EVEN THE PSC IS NOT EXECUTED . THE LD. AUTHORISED REPRESENTATIVE HAS SUBMITTED THAT THIS I SSUE OF ALLOWABILITY OF THIS EXPENDITURE IS COVERED IN ITS FAVOUR BY THE DECISION OF ONGC VIDESH LTD VERSUS DCIT [37 SOT 97] WHEREIN IT HAS BEEN HELD AS UNDER:- 15. WITH REGARD TO DISALLOWING CLAIM OF EXPENSES O F RS. 43.85 LAKHS INCURRED FOR PURCHASE AND EVALUATION OF THE SEISMIC DATA OF FOREIGN BLOCKS, ON THE PLEA OF SAME BEING CAPITAL IN NATURE, WE FOUND THAT ASSESSEE BEING ENG AGED IN THE BUSINESS OF EXPLORATION AND PRODUCTION OF HYDROCARBONS IN OTHER COUNTRIES TO AUGMENT THE OIL RESOURCES OF INDIA, IT WAS CONTINUOUSLY EVALUATING VARIOUS BUSINESS OPPORTUNITIES BEFORE ACQUIRING A PARTICULA R FIELD/BLOCK. SINCE ALL THESE OPPORTUNITIES HAVE TO BE EVALUATED AND STUDIED BEFORE TAKING DECISION TO INV EST AND ENTER INTO A CONTRACT, THE PROCESS OF EVALUATION OF THE BLOCK STARTED WITH SUBMITTING TENDER FEE/DATA FEE, ETC. AND THEN THE SEISMIC DATA HAD TO BE EVALUATED IN SEISMI C PROCESSING CENTRE. AFTER EVALUATING THE SAME, THE A SSESSEE WAS TO TAKE DECISION AS TO WHETHER INVESTMENTS SHOU LD BE MADE IN THE PROJECT OR NOT. THERE IS NO DISPUTE TO THE FACT THAT IN ALL INDUSTRIES AN ACTIVITY FOR FURTHERANCE OF ITS BUSINESS OR EVALUATION OF BETTER PROFIT-EARNING PRO CESS IN ONE MANNER OR OTHER IS UNDERTAKEN. EFFORT TO EVALUA TE THE PROSPECTS OF BETTER EARNING PROFIT IS NOT A SEPARAT E ACTIVITY BUT IS IN THE COURSE OF CONDUCT OF NORMAL DAY-TO-DA Y BUSINESS. THESE EXPENDITURES CANNOT BE SAID TO BRING AN ENDURING BENEFIT TO THE BUSINESS NOR THE SAME CAN B E SAID AS INITIAL OUTLAY FOR EXPANSION OF BUSINESS. IN THE INSTANT CASE, THE EXPENDITURE SO INCURRED BY THE ASSESSEE I S FOR FURTHERANCE OF ACTIVITIES UNDERTAKEN BY IT IN THE N ORMAL COURSE OF ITS BUSINESS. THE SAME ARE INCURRED ON CONTINUOUS BASIS FOR EVALUATION OF BUSINESS ACTIVIT IES . IN VIEW OF THE DECISION OF BOMBAY HIGH COURT IN THE CA SE OF CIT V. ESSAR OIL LTD. [IT APPEAL NO. 921 OF 2008, D ATED 16-10-2008], SUCH EXPENDITURE IS TO BE ALLOWED AS R EVENUE EXPENDITURE. HONBLE CALCUTTA HIGH COURT IN THE CAS E OF KESORAM INDUSTRIES & COTTON MILLS LTD. V. CIT [1992 ] 196 ITR 845 HELD THAT WHERE THE SETTING UP DOES NOT AMO UNT TO STARTING OF NEW BUSINESS BUT EXPANSION OR EXTENSION OF THE BUSINESS ALREADY BEING CARRIED ON BY THE ASSESSEE, EXPENSES IN CONNECTION WITH SUCH EXPANSION OR EXTEN SION OF THE BUSINESS MUST BE HELD TO BE DEDUCTIBLE AS RE VENUE EXPENSES. ONE HAS TO CONSIDER PURPOSE OF THE EXPEND ITURE ITA NO.6791/DEL./2017 20 AND ITS OBJECT AND EFFECT. ACCORDINGLY, IT WAS HELD THAT EXPENSES PERTAINING TO EXPLORING FEASIBILITY OF EXP ANSION OR EXTENSION OF BUSINESS ARE REVENUE EXPENDITURE AN D NOT CAPITAL EXPENDITURE. THE EXPENDITURE SO INCURRED BY THE ASSESSEE IN THE NORMAL COURSE OF BUSINESS OF EXPLOR ATION AND PRODUCTION OF OIL, BEING REVENUE IN NATURE, IS LIABLE TO BE ALLOWED AS A DEDUCTION. SIMILAR CLAIM WAS ALSO MADE BY THE ASSESSEE IN THE EARLIER YEAR. WE, THEREFORE, DIRECT THE ASSESSING OFFICER TO ALLOW THE SAME AS REVENUE EXPENDITURE. AS WE HAVE ALLOWED GROUND NOS. 3 TO 3. 2, THE ALTERNATE GROUND NO. 3.3 AS TAKEN BY THE ASSESSEE B ECOME INFRUCTUOUS. [EXTRACTED TAXMANN.COM][UNDERLINE SUPPLIED BY US] NEITHER THE LD. ASSESSING OFFICER NOR THE LD. DEPAR TMENTAL REPRESENTATIVE COULD PRESS ANY OTHER JUDICIAL PRECE DENT WHICH SHOWS THAT AMOUNT SPENT BY THE ASSESSING IS NOT ALL OWABLE AS REVENUE EXPENDITURE UNDER SECTION 37 (1) OF THE ACT . IT IS ALSO NOT THE ARGUMENT OF THE REVENUE THAT SUCH EXPENDITURE I NCURRED BY THE ASSESSEE IS CAPITAL IN NATURE. FURTHERMORE, THE LD. AR HAS ALSO PRESSED INTO SEVERAL DECISIONS WHICH SAY THAT THAT EXPENSES INCURRED TOWARDS EXTENSION OF BUSINESS WHICH WAS SU BSEQUENTLY ABANDON OR DID NOT FRUCTIFY, ARE ALLOWABLE. THEREFO RE IN VIEW OF THE ABOVE DECISIONS WHEREIN IT IS BEEN HELD THAT TH E EXPENSES FOR PURCHASE OF THIS KIND OF DATA IS UNNECESSARY REVENU E EXPENDITURE REQUIRED TO BE INCURRED BY THE ASSESSEE FOR THE PUR POSE OF ITS BUSINESS AND HENCE IS ALLOWABLE AS REVENUE EXPENDIT URE, WE ALSO DIRECT THE LD. ASSESSING OFFICER TO ALLOW THE EXPEN DITURE INCURRED BY THE ASSESSEE ON PURCHASE OF DATA AND OTHER RELEV ANT EXPENSES AMOUNTING TO RS. 220983295/. IN THE RESULT GROUND NO. 6 OF THE APPEAL OF THE ASSESSEE IS ALLOWED. 20. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, WE AR E OF THE CONSIDERED VIEW THAT SINCE THE AO/DRP HAVE NOT DISP UTED THE INCURRENCE OF EXPENSES AND HAVE ALSO NOT DISPUTED T HE FACT THAT THE TAXPAYERS BUSINESS WAS ALREADY RUNNING AND EXPENSE S ARE FOR THE BUSINESS OF PROSPECTING EXPLORATION AND PRODUCTION OF CRUDE OIL AND NATURAL GAS IN INDIA, THE SAME CANNOT BE DISALLOWED ON THE GROUND THAT THESE EXPENSES ARE INCURRED FOR FUTURE PROSPEC TS OF THE TAXPAYER ITA NO.6791/DEL./2017 21 FOR WHICH PSC WAS NOT EXECUTED BECAUSE WHEN EXPENSE S ARE INCURRED FOR SUSTENANCE OF THE BUSINESS, TO EVALUAT E THE PROSPECT OF BETTER PROFIT AS PER AIMS AND OBJECTS OF THE TAXPAY ER, THE SAME HAS TO BE TREATED AS REVENUE EXPENSES IN NATURE. SO, F OLLOWING THE DECISION RENDERED BY THE COORDINATE BENCH OF THE TR IBUNAL IN TAXPAYERS OWN CASE FOR AY 2010-11 (SUPRA), AO IS D IRECTED TO ALLOW THE EXPENDITURE INCURRED BY THE TAXPAYER ON C OST OF PURCHASE OF SEISMIC DATA, GENERAL AND ADMINISTRATIVE EXPENSE S IN CONNECTION WITH PROPOSED NELP-VIII AND STAFF COST AND PROJECT MANAGEMENT AND CONSULTANCY CHARGES OF RS.40,70,92,375/-. SO, GROUND NO.11 IS DETERMINED IN FAVOUR OF THE TAXPAYER. GROUND NO.12 21. AO/DRP HAVE DISALLOWED THE EXPENDITURE OF RS.1,96,49,04,712/- INCURRED BY THE TAXPAYER ON NON -PRODUCING BLOCK ON THE GROUND THAT THE EXPENDITURE INCURRED B Y THE TAXPAYER IN OTHER PSCS PRIOR TO COMMERCIAL PRODUCTION SHALL BE AGGREGATED AND CLAIMED ONLY FROM THE YEAR OF COMMERCIAL PRODUC TION. SO, THE EXPENSES INCURRED BY THE TAXPAYER CONCERNING OIL BL OCKS WHERE COMMERCIAL PRODUCTIONS HAS NOT YET STARTED HAS TO B E AMORTIZED AND CARRIED OVER AND CAN BE SET OFF ONLY WHEN REVENUE I S EARNED FROM SUCH OIL BLOCKS AFTER COMMENCEMENT OF COMMERCIAL PR ODUCTION. ITA NO.6791/DEL./2017 22 THE AO ALSO INVOKED SECTION 42 OF THE ACT TO DISALL OW THE EXPENSES. 22. THE TAXPAYER HAS COME UP WITH DETAIL OF EXPENDI TURE INCURRED ON NON-PRODUCING BLOCKS WHICH IS AS UNDER :- BLOCK AMOUNT (RS.) KG-OSN 2004/1 1,08,03,21,692 MN-DWN-2002/2 58,53,00,833 TOTAL 1,66,56,22,525 23. THE LD. AR FOR THE TAXPAYER CONTENDED THAT SECT ION 42 IS NOT APPLICABLE AS IT ALLOWS BENEFIT/DEDUCTION TO THE EL IGIBLE TAXPAYER IN ADDITION TO THE ALLOWANCE PERMISSIBLE UNDER THE ACT AND AS SUCH, THESE DEDUCTIONS ARE ALLOWABLE U/S 37(1) OF THE ACT AND RELIED UPON DECISION RENDERED BY THE COORDINATE BENCH OF THE TR IBUNAL IN A CASE CITED AS ONGC VIDESH LTD. VS. DCIT 37 SOT 97. 24. THE LD. AR FOR THE TAXPAYER HAS ALSO CONTENDED THAT THIS ISSUE HAS ALSO BEEN DECIDED IN FAVOUR OF THE TAXPAY ER IN ITS OWN CASE FOR AY 2010-11. FOR READY PERUSAL, OPERATIVE PART OF THE ORDER IS EXTRACTED AS UNDER :- 54. SECTION 42(1) MAKES IT CLEAR THAT FOR THE PUR POSE OF COMPUTING THE PROFITS AND GAINS OF ANY BUSINESS CON SISTING OF PROSPECTING, EXTRACTION OR PRODUCTION OF MINERAL OI L, THE ASSESSEE WOULD BE ENTITLED TO CLAIM DEDUCTION IN RESPECT OF THREE ITEMS OF EXPENDITURE IN LIEU OF OR IN ADDITION TO THE ALLOWA NCES ADMISSIBLE ITA NO.6791/DEL./2017 23 UNDER THE ACT, VIZ., (I) EXPLORATION COST, WHICH IS CAPITAL EXPENDITURE, (II) DEVELOPMENT COST, WHICH IS ALSO C APITAL EXPENDITURE, AND (III) PRODUCTION COSTS WHICH ARE O PERATIONAL EXPENDITURE. THEREFORE IT IS ERRONEOUS BELIEF THAT IN CASE OF PSC THE ASSESSEE IS ONLY ENTITLED TO DEDUCTION, WHICH A RE COVERED THERE AND NOT ANY OTHER DEDUCTION WHICH ARE COVERED UNDER THE ANY OTHER PROVISIONS OF THE ACT. WE HAVE ALREADY DI SCUSSED THE PROVISION OF SECTION 42 OF THE ACT IN DECIDING SOME OF THE GROUNDS OF APPEAL OF THE ASSESSEE. THEREFORE, WE REJECT THE CONTENTION OF THE REVENUE THAT IF THE EXPENDITURE DO NOT FIND ALL OWABILITY UNDER SECTION 42, IT CANNOT BE ALLOWED TO THE ASSESSEE. N OW COMING TO THE VARIOUS EXPENDITURE WHICH HAS BEEN INCURRED BY THE ASSESSEE ARE IN THE FORM OF VARIOUS EXPENDITURE PERTAINING T O OIL EXPLORATION BLOCKS FOR WHICH THE PSC HAS BEEN ENTER ED INTO. OUT OF THE SAME, THE LD. ASSESSING OFFICER HAS ALLOWED SOME OF THE EXPENDITURE AND DISALLOWED REST OF THE EXPENDITURE. THE BELOW CHART DEPICTS THIS PICTURE. 55. FROM THE ABOVE CHART IT IS APPARENT THAT OUT O F THE TOTAL EXPENDITURE INCURRED OF RS. 931819021/ THE LD. ASS ESSING OFFICER HAS ALLOWED THE EXPENDITURE OF RS. 47150523 3/ WHICH IS THE COST OF RESPECTIVE PSC AND SHARED WITH JV PARTN ERS. THE BALANCE COST WHICH IS NOT SHARED BY THE JV PARTNERS AMOUNTING TO RS. 460313788/ WAS DISALLOWED FOR THE REASON THAT THESE COST HAVE NOT BEEN SHARED BY THE JV PARTNERS AND THEREFO RE IT IS NOT INCURRED FOR THE PURPOSES OF THE BUSINESS OF THE AS SESSEE AND CLASSIFICATION ALLOWED BY AO DISALLOWED BY AO TOTAL KG-OSN-2004/1 102,937,064 71,638,553 174,575,617 MN-DWN-2002/2 330,681,668 105,241,658 435,923,326 KG-DWN-98/4 37,886,501 62,450,282 100,336,783 OTHER EXPENDITURE PRIMARILY FOR PURCHASE OF SEISMIC DATA (FOR NEW OPPORTUNITIES IN EXPLORATION) 220,983,295 220,983,295 TOTAL 471,505,233 460,313,788 931,819,021 REMARKS COST PERTAINING TO THOSE SHARED WITH JV PARTNERS NON-JV COST (PRIMARILY TIME-WRITING COSTS AND DEVELOPMENT EXPENSES) ITA NO.6791/DEL./2017 24 HENCE DISALLOWABLE. FURTHER SUM OF RS.220983295/ I NCLUDED IN THE DISALLOWANCE OF RS. 460313788/ WAS PERTAINING TO THE PURCHASE OF SEISMIC DATA FOR EXPLORING NEW OPPORTUN ITIES IN THE BUSINESS OF THE COMPANY UNDER THE PRETEXT THAT THES E ARE WITH RESPECT TO THE FUTURE BUSINESSES WHICH HAS NOT YET COMMENCED. THEREFORE, PRIMARY THE DISALLOWANCES OF RS. 4603137 88/ INCLUDES A SUM OF RS 22098 3295/ FOR PURCHASE OF S EISMIC DATA AND BALANCE AMOUNT PRIMARILY WITH RESPECT TO TIME W RITING COST AND DEVELOPMENT EXPENSES. THE TIME WRITING CHARGES AS IT IS EXPLAINED BY THE ASSESSEE ARE FOR THE PURPOSE OF DR ILLING AND SUBSURFACE INPUTS, ANALYSIS AND ADMINISTRATIVE EXPE NSES WITH RESPECT TO EXECUTIVE, FINANCE, HUMAN RESOURCES, LEG AL, COMMERCIAL, ETC THE DETAILED BREAKUP OF THESE TIME WRITING CHARGES FOR EACH OF THE PSC CONTRACT WERE EXPLAINED BY THE ASSESSEE BY GIVING BREAKUP OF THEIR COST AS WELL AS NATURE OF THOSE EXPENDITURE. ASSESSEE EXPLAINED THAT AS IT NE EDS TO SAFEGUARD ITS INTEREST IN THE BLOCKS IT HAS EMPLOYE D TECHNICAL EXPERTS FOR WHICH TIME WRITING CHARGES ARE INCURRED . FURTHER, FOR THE SUPPORT FUNCTIONS. IT ALSO HIRES SEVERAL OTHER PERSONS AND NECESSARILY HAS TO INCUR OTHER EXPENDITURE WITH RES PECT TO ITS FINANCE AND ACCOUNTING ACTIVITIES, ITS HUMAN RESOUR CE ACTIVITIES AND LEGAL COMPLIANCE AND LITIGATION ACTIVITIES. THE SE EXPENDITURE ARE THOUGH INCURRED IN SUPPORT TO THE PSC CONTRACTS EXECUTED BY THE ASSESSEE AT MAY NOT BE NECESSARILY SHARED BY TH E OTHER JOINT- VENTURE PARTNERS. MERELY BECAUSE IT IS NOT SHARED B Y OTHERS, WHICH MAY BE FOR MANY REASONS, IT CANNOT BE SAID TH AT THE ASSESSEE HAS NOT INCURRED THESE EXPENDITURE WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS OF THE ASS ESSEE. WITH RESPECT TO THE DETAILS AVAILABLE WITH THE ASSESSING OFFICER, IT WAS NOT POINTED OUT A SINGLE INSTANCE THAT ANY OF THE E XPENDITURE ARE NOT INCURRED BY THE ASSESSEE FOR THE PURPOSES OF IT S BUSINESS. IN FACT, OUT OF THE TOTAL EXPENDITURE THE LD. ASSESSIN G OFFICER HAS PARTLY ALLOWED THE EXPENDITURE AND PARTLY DISALLOWE D THE EXPENDITURE BY USING THE SINGLE YARDSTICK THAT IF E XPENDITURE ARE SHARED BY THE JV SAME ARE ALLOWABLE AND IF SAME IS NOT SHARED BY JV PARTNERS, THEN IT IS NOT ALLOWABLE. WE FAILED TO SEE ANY SUCH PROVISION IN THE ACT THAT IF THE OTHER PARTY IN THE JOINT-VENTURE DO NOT AGREE TO SHARE THE PARTICULAR COST, THE COST IN CURRED BY ONE OF THE PARTNERS OF THAT JOINT-VENTURE BECOMES THE EXPE NDITURE NOT FOR THE PURPOSE OF THE BUSINESS OF THAT PARTNER. NO SUC H PROVISION HAS ALSO BEEN BROUGHT TO OUR NOTICE BY THE REVENUE. IT IS ALSO NOT THE CASE OF THE REVENUE THAT DETAILS OF THOSE EXPEN DITURE ARE NOT AVAILABLE BEFORE THEM OR ASSESSEE HAS FURNISHED INC OMPLETE INFORMATION FOR ITS ALLOWABILITY. FURTHER, NO JUDIC IAL PRECEDENT WAS CITED BEFORE US BY REVENUE, WHICH SAYS THAT SUC H EXPENDITURE ARE NOT ALLOWABLE TO THE ASSESSEE. THEREFORE ACCORD ING TO US THE EXPENSES INCURRED BY THE ASSESSEE WITH RESPECT TO I) KG-OS- 02004/1 OF RS.71638553 ITA NO.6791/DEL./2017 25 II) MN DWN 2002/2 OF RS.105241649 III) KG-DWN-98/4 OF RS.62450283 CANNOT BE DISALLOWED. IN VIEW OF THIS WE DIRECT THE LD. ASSESSING OFFICER TO DELETE THE DISALLOWANCE MADE WITH RESPEC T TO ABOUT 3 ITEMS. 25. KEEPING IN VIEW THE FACTS AND CIRCUMSTANCES OF THE CASE WHEREIN THE TAXPAYER HAS BROUGHT ON RECORD THE COMP LETE DETAILS OF THE EXPENDITURE INCURRED AND THERE IS NO DISPUTE BE TWEEN THE PARTIES TO THE APPEAL THAT ALL THE EXPENSES HAVE BEEN INCUR RED FOR FURTHERANCE OF ITS BUSINESS, THOUGH INCURRED IN SUP PORT TO THE PSC CONTRACTS EXECUTED BY THE TAXPAYER, THE SAME CANNOT BE DISALLOWED MERELY ON THE GROUND THAT IT IS NOT SHARED BY OTHER S, PARTICULARLY, WHEN IT IS NOT DISPUTED THAT THESE EXPENSES HAVE BE EN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF TAXPAYER. 26. MOREOVER, THE AO HAS NOT DISPUTED THE INCURRENC E OF EXPENSES FOR THE PURPOSE OF BUSINESS. EVEN OTHERWI SE, THE EXPENSES INCURRED BY THE TAXPAYER FOR FURTHERANCE O F ITS BUSINESS CANNOT BE DISALLOWED MERELY ON THE GROUND THAT THE OTHER PARTY IN THE JOINT VENTURE HAS NOT AGREED TO SHARE THE PARTI CULAR COST INCURRED BY ONE PARTY TO THE JOINT VENTURE. SO, FOLLOWING T HE DECISION RENDERED BY THE COORDINATE BENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2010-11 (SUPRA), THE DISALLOWANCE M ADE BY THE AO/DRP IS NOT SUSTAINABLE IN THE EYES OF LAW, HENCE DISALLOWANCE ITA NO.6791/DEL./2017 26 IS ORDERED TO BE DELETED AND GROUND NO.12 IS DETERM INED IN FAVOUR OF THE TAXPAYER. GROUND NO.13 27. AO/DRP HAVE DISALLOWED AN AMOUNT OF RS.8,33,97, 904/- CLAIMED BY THE TAXPAYER @ 6% AS LOSS ON TRANSPORTAT ION OF GAS ON THE GROUND THAT THE PROVISION FOR TRANSPORTATION LO SS CAN BE EQUATED TO THE PROVISION OF EXPENSES PAID AT THE YEAR END. IT IS THE CASE OF THE TAXPAYER THAT ONGC, RELIANCE INDUSTRIES LIMITED AND THE TAXPAYER HAVE ENTERED INTO A SETTLEMENT AGREEMENT D ATED 31.12.2005 WITH ONGC (TRANSPORTER) FOR TRANSPORTATI ON OF GAS AND CONDENSATE FROM THE MID AND SOUTH TAPTI CONTRACT AR EAS FROM THE TAPTI DELIVERY POINT TO PMT REDELIVERY POINT. IT I S ALSO THE CASE OF THE TAXPAYER THAT AS PER CLAUSE 4.4 OF THE AGREEMEN T, THE LOSSES ON TRANSPORTATION OF GAS SHALL BE DETERMINED BY CONDEN SATE EXPERT JOINTLY APPOINTED BY JOINT VENTURE PARTNERS AND TRA NSPORTERS, HOWEVER PENDING APPOINTMENT OF EXPERT BGEPIL, THE T AXPAYER HAS PROVIDED FOR TRANSPORTATION LOSSES @ 6% OF THE COND ENSATE REVENUE ON ESTIMATE BASIS. 28. THE LD. AR FOR THE TAXPAYER CONTENDED THAT THE AO HAS DISALLOWED THE TRANSPORTATION LOSS BY RELYING UPON THE DECISION RENDERED BY THE HONBLE SUPREME COURT IN CASE OF SEAGRAM ITA NO.6791/DEL./2017 27 DISTILLERIES (P) LTD. VS. CIT-III APPEAL (C) NO.1 2102 OF 2016 WHICH IS NOT APPLICABLE TO THE CASE OF THE TAXPAYER FOR THE FOLLOWING REASONS :- IN THE SAID CASE, THE PROVISION FOR TRANSPORTATION LOSS WAS MADE ON DISPATCH GOODS WHEN THE BREAKING OF BOTTLE MAYOR MAY NOT HAPPEN. THUS, THERE WAS NO PRESENT OBLIGATION WITH RESPECT TO LIABILITY IN THE DATE ON WHICH THE PROVISION WAS CR EATED. THUS, THIS LIABILITY WAS CONTINGENT IN NATURE AS PER ACCO UNTING STANDARD 29 'PROVISIONS, CONTINGENT LIABILITIES, CO NTINGENT ASSETS' IN THAT CASE. IN THE APPELLANT'S CASE, THE PROVISION IS MADE ON C OMPLETION OF THE SALE OF CONDENSATE WHERE THE LOSS IS BOUND TO H APPEN ON TRANSPORTATION OF CONDENSATE DUE TO PECULIAR NATURE OF APPELLANT'S BUSINESS. THUS, THERE EXISTS A PRESENT OBLIGATION ON ACCOUNT OF PAST EVENT. ACCORDINGLY, THE SAME REPRES ENT PROVISIONS WHICH IS ALLOWABLE AS DEDUCTION IN TERMS OF PRINCIP LES LAID DOWN BY THE HON'BLE SUPREME COURT IN THE CASE OF BHARAT EARTH MOVERS V. COMMISSIONER OF INCOME-TAX (SUPRA). IN THE CASE BEFORE SUPREME COURT, THE PROVISION WAS MADE ON AD- HOC BASIS. WHEREAS IN THE CURRENT CASE, THE PROVISI ON IS MADE ON THE BASIS OF MEMORANDUM OF UNDERSTANDING WHICH IS A N ESTIMATE AGREED BY BOTH THE PART TO THE AGREEMENT. THUS, IT IS SUBMITTED THAT THE ESTIMATE IN THE CURRENT SCENARIO IS MADE O N A SOUND BASIS AND OUGHT TO BE ALLOWED TO THE APPELLANT. 29. THE LD. DR FOR THE REVENUE TO REPEL THE ARGUMEN TS ADDRESSED BY THE LD. AR FOR THE TAXPAYER CONTENDED THAT THE S ETTLEMENT AGREEMENT RELIED UPON BY THE TAXPAYER WAS NOT PRODU CED BEFORE AO WHICH OTHERWISE SAYS THAT THE TRANSPORTATION LOS S IS TO BE DETERMINED BY THE EXPERT TO BE APPOINTED BY JOINT V ENTURE PARTNER. 30. WHEN WE EXAMINE THE FACTS AND CIRCUMSTANCES OF THE CASE IN VIEW OF THE ADMITTED CASE OF THE TAXPAYER THAT DURI NG THE AY 2016- 17, INDEPENDENT EXPERT APPOINTED BY THE JOINT VENTU RE PARTNERS HAD ITA NO.6791/DEL./2017 28 DETERMINED THE LOSS ON CONDENSATE AT 1.7% AND WITHO UT PREJUDICE, THE TAXPAYER ALSO MADE A PRAYER FOR ALLOWING THE LO SS OF TRANSPORT OF CONDENSATE @ 1.7% DURING THE YEAR UNDER ASSESSME NT, WE ARE OF THE CONSIDERED VIEW THAT WHEN UNDISPUTEDLY AS PER S ETTLEMENT AGREEMENT ENTERED INTO BETWEEN THE TAXPAYER, ONGC A ND RELIANCE INDUSTRIES LIMITED WITH ONGC (TRANSPORTER) FOR TRAN SPORTATION OF GAS AND CONDENSATE, THE LOSS IS TO BE DETERMINED BY THE EXPERT APPOINTED BY THE JOINT VENTURE PARTNERS, THERE IS N O QUESTION TO RESORT TO THE ESTIMATION TO CLAIM SUCH LOSS. MORE SO IN AY 2016- 17, LOSS HAS BEEN DETERMINED BY THE EXPERT APPOINTE D AS PER SETTLEMENT AGREEMENT @ 1.7%. SO, WE ARE OF THE CON SIDERED VIEW THAT THE MATTER IS REQUIRED TO BE REMANDED BACK TO THE AO TO DECIDE AFRESH AFTER PROVIDING AN OPPORTUNITY OF BEING HEAR D TO THE TAXPAYER BY FOLLOWING THE RULE OF CONSISTENCY. SO, GROUND N O.13 IS DETERMINED IN FAVOUR OF THE TAXPAYER FOR STATISTICA L PURPOSES. GROUND NO.14 31. THE TAXPAYER CLAIMED AN AMOUNT OF RS.1,50,21,66 ,730/- ON ACCOUNT OF WRITE BACK OF PROVISIONS OF DOUBTFUL DEB TS OUT OF WHICH AO TAXED WRITE BACK AMOUNT OF RS.20,67,360/- ON THE GROUND THAT THE TAXPAYER HAS NOT GIVEN ANY REASON FOR WRITING B ACK PROVISIONS FOR DOUBTFUL DEBTS AND CLAIMING THE SAME AS EXPENDI TURE IN THE ITA NO.6791/DEL./2017 29 COMPUTATION OF INCOME. IT IS CONTENDED BY LD. AR F OR THE TAXPAYER THAT THE AO HAS FAILED TO APPRECIATE THAT PROVISION S FOR DOUBTFUL DEBTS OF RS.20,67,360/- CREDITED IN THE PRECEDING Y EAR HAS NOT BEEN CLAIMED AS DEDUCTION IN THE YEAR IN WHICH SUCH PROV ISION WAS CREDITED. THE CONTENTION RAISED BY LD. AR FOR THE TAXPAYER IS SUSTAINABLE BECAUSE WHEN THE PROVISIONS OF DOUBTFUL DEBTS OF RS.20,67,360/- CREDITED IN THE PRECEDING YEAR HAS N OT BEEN CLAIMED IN THE YEAR IN WHICH SUCH PROVISIONS WERE CREDITED, THE WRITE BACK OF THE SAME IN THE SUBSEQUENT YEAR I.E. YEAR UNDER ASSESSMENT IS NOT TAXABLE AS IT WOULD AMOUNT TO DOUBLE TAXATION. SO, WE ARE OF THE CONSIDERED VIEW THAT IT IS MERELY AN ARITHMETIC CAL CULATION AND AO TO VERIFY THE SAME AND TO DECIDE ACCORDINGLY. SO, GROUND NO.14 IS DETERMINED IN FAVOUR OF THE TAXPAYER. GROUND NO.15 32. AO DISALLOWED EXCHANGE LOSS ON INTEREST ON BG A SIA PACIFIC PTE LTD. LOAN ON THE GROUND THAT THE LOAN ITSELF IS BEING TREATED AS A COLOURABLE DEVICE USED BY THE TAXPAYER TO INCREASE ITS COST AND REDUCE PROFITS. THE LD. AR FOR THE TAXPAYER CONTEN DED THAT WHEN THE EXCHANGE LOSS IS INCURRED BY THE TAXPAYER DEBIT ED TO THE PROFIT & LOSS ACCOUNT AS PER PSC WHERE FOREIGN EXCHANGE LO SS IS CONSIDERED AS AN ALLOWABLE DEDUCTION, AO HAS ERRED IN DISALLOWING ITA NO.6791/DEL./2017 30 THE SAME AND RELIED UPON THE DECISION RENDERED BY H ONBLE UTTARAKHAND HIGH COURT IN CASE CITED AS CIT VS. ENRON OIL AND GAS INDIA LIMITED 305 ITR 68 , WHICH WAS AFFIRMED BY HONBLE SUPREME COURT REPORTED IN 305 ITR 75 . 33. HONBLE UTTARAKHAND HIGH COURT IN CASE CITED AS CIT VS. ENRON OIL AND GAS INDIA LIMITED (SUPRA) HAS DECIDED THE IDENTICAL ISSUE IN FAVOUR OF THE TAXPAYER BY RETURNING FOLLOW ING FINDINGS :- HELD, DISMISSING THE APPEAL, THAT UNDER ARTICLE 1. 6.1 OF THE ACCOUNTING PROCEDURE SET OUT IN APPENDIX C TO THE P RODUCTION SHARING CONTRACT, THE EXPENDITURE INCURRED IN FOREI GN EXCHANGE BY THE CO-VENTURER DURING ANY PARTICULAR CALENDAR M ONTH HAD TO BE CONVERTED INTO INDIAN RUPEE AT THE RATE WHICH HA D TO BE DETERMINED AT THE END OF THE CALENDAR MONTH. WHEN T HE REVENUE WAS ACCEPTING THE TAX ON THE PROFITS/GAINS ACCRUED TO THE ASSESSEE OUT OF THE CHANGE IN THE FOREIGN EXCHANGE RATES IN OTHER ASSESSMENT YEARS, IT COULD NOT DENY DEDUCTION ON AC COUNT OF LOSS INCURRED FOR THAT REASON. THE COMMISSIONER (APPEALS ) AS WELL AS THE TRIBUNAL WERE RIGHT IN HOLDING THAT THE DEDUCTI ON CLAIMED BY THE ASSESSEE ON ACCOUNT OF FOREIGN EXCHANGE LOSS WA S ADMISSIBLE TO IT UNDER SECTION 42 OF THE ACT READ WITH THE CLA USES OF THE PRODUCTION SHARING CONTRACT. 34. FOLLOWING THE DECISION RENDERED BY HONBLE UTTA RAKHAND HIGH COURT IN CIT VS. ENRON OIL AND GAS INDIA LIMITED (SUPRA), WE ARE OF THE CONSIDERED VIEW THAT FOREIGN EXCHANGE LOSS INCURRED BY THE TAXPAYER HAS BEEN DEBITED TO THE PROFIT AND LOSS ACCOUNT AS PER SPECIFIC PROVISIONS OF PSC, WHEREIN FOREIGN EXC HANGE LOSS IS TREATED AS AN ALLOWABLE DEDUCTION BUT AO/DRP HAVE E RRED IN DISALLOWING THE SAME. SO, WE ORDER TO DELETE THE D ISALLOWANCE OF ITA NO.6791/DEL./2017 31 RS.5,31,59,102/- MADE BY THE AO. SO, GROUND NO.15 IS DETERMINED IN FAVOUR OF THE TAXPAYER. GROUND NO.16 35. AO/DRP HAVE DISALLOWED THE HEAD OFFICE EXPENSES AMOUNTING TO RS.240,04,33,920/- BY RESTRICTING ALLO WABILITY OF THESE EXPENDITURE TO 5% OF THE ADJUSTED TOTAL INCOM E OF THE TAXPAYER BY INVOKING THE PROVISIONS CONTAINED U/S 4 4C OF THE ACT. IT IS THE CASE OF THE TAXPAYER THAT IT HAS INCURRED EXPENSES TO UNDERTAKE ACTIVITIES REQUIRED BY THE PSC WITH REGAR D TO ITS STANDARD OF OPERATION, INCLUDING THE QUALITY OF EXECUTION OF WORK, ACCESS TO LATEST INDUSTRY INFORMATION AND GLOBAL UPDATES, SAF ETY OF ITS EMPLOYEES AND ENVIRONMENT ETC. AND ALL THESE EXPENS ES ARE INCURRED ON THE BASIS OF COMMERCIAL EXPEDIENCY DETE RMINED BY THE TAXPAYER AND THE SAME NEED NOT BE ACCEPTED BY THE J OINT VENTURE PARTNER. LD. AR FOR THE TAXPAYER CONTENDED THAT ID ENTICAL ISSUE HAS ALREADY BEEN DECIDED IN FAVOUR OF THE TAXPAYER IN I TS OWN CASE FOR AY 2010-11 (SUPRA). 36. UNDISPUTEDLY, THIS ISSUE WAS DIRECTLY AND SUBST ANTIALLY COME UP FOR ADJUDICATION FOR THE COORDINATE BENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2010-11 AND DECIDED IN F AVOUR OF THE TAXPAYER BY RETURNING FOLLOWING FINDINGS :- ITA NO.6791/DEL./2017 32 COMING TO THE FACTS OF THE IMPUGNED GROUND, THE LD. ASSESSING OFFICER HAS DISALLOWED THE SAME EXPENDITU RE FOR THE ONLY REASON THAT HAD THE SAME WERE INCURRED FOR THE PRODUCTION IT SHOULD HAVE BEEN PASSED THROUGH THE JOINT VENTURE A ND SHARED BY ALL THE PARTNERS AND THESE EXPENSES ARE NOT INCURRE D WHOLLY AND ACTUALLY FOR THE PURPOSE OF THE BUSINESS OF THE ASS ESSEE. NATURE OF THE EXPENSES WHICH HAVE BEEN DISALLOWED BY THE L D. ASSESSING OFFICER ARE AS UNDER:- PARTICULARS AMOUNT TANKER & RELATED COSTS 115,534,442 TUG BOAT COSTS 70,464,943 SAFETY ENVIRONMENT & MATERIALS 11,355 TECHNICAL & ENGINEERING SERVICES 316,786,095 LESS: REVERSAL OF WATER TRANSPORTATION & OTHER CHARGES (8,344,443) TOTAL BG EXCLUSIVE PRODUCTION COST. 494,452,392 THE ABOVE EXPENDITURE ARE IN THE NATURE OF TANKER E XPENDITURE, TUG AND BOAT EXPENDITURE, SAFETY ENVIRONMENT AND MA TERIAL EXPENDITURE AS WELL AS TECHNICAL AND ENGINEERING SE RVICES. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AS SESSEE HAS FURNISHED THE DETAILS OF THOSE EXPENDITURE. MERELY BECAUSE THE JOINT-VENTURE PARTNERS ARE NOT SHARING THE COST/EXP ENSES WHICH IS BEEN INCURRED BY THE ASSESSEE, IT DOES NOT BECOME D ISALLOWABLE IN THE HANDS OF THE ASSESSEE. WE FIND NO SUCH CONDITIO N EXISTING EITHER UNDER SECTION 42, OR UNDER SECTION 37 (1) OF THE INCOME TAX ACT. THEREFORE, WE REJECT THE CONTENTION OF THE REVENUE THAT UNLESS THE EXPENDITURE IS NOT BORNE BY ALL THE JV P ARTNERS THE EXPENSES CANNOT BE ALLOWED TO THE ASSESSEE. IN FACT , IF THE JV PARTNERS SHARE THE EXPENDITURE, THERE CANNOT BE ANY QUESTION OF CLAIM OF SUCH EXPENDITURE IN THE HANDS OF THE ASSES SEE, ONCE AGAIN. FURTHER, IF THE EXPENSES ARE NOT SPECIFIED I N THE AGREEMENT U/S 42 (1), EVEN IF THE JV PARTNERS AGREE TO SHARE THOSE EXPENDITURE, IT IS NOT ALLOWABLE U/S 42 (1) OR SECT ION 37 (1) OF THE ACT. NOW IT NEEDS TO BE EXAMINED, WHETHER THE ASSES SEE HAS INCURRED EXPENDITURE FOR THE PURPOSES OF ITS BUSINE SS OR NOT. THE ASSESSEE HAS STATED THAT IT HAS INCURRED SUCH EXPEN DITURE HAVING REGARD TO ITS STANDARD OF OPERATION AND THE QUALITY OF EXECUTION WORK, SAFETY OF ITS EMPLOYEES IN THE ENVIRONMENT. T HESE EXPENSES ARE REQUIRED TO BE INCURRED BY THE ASSESSEE BASED O N THE COMMERCIAL EXPEDIENCY. THE ASSESSEE HAS STATED THAT IN RELATION TO THE SUPPORT FUNCTIONS, WHICH ARE INNOVATIVELY IN EVITABLE FOR CARRYING ON ITS BUSINESS AND INCURRED BASED ON THE COMMERCIAL EXPEDIENCY ARE EXPENSES BELONGING TO THE ASSESSEE W HICH CANNOT BE ACCEPTED BY THE OPERATING BOARD. FURTHER, THERE MAY BE CERTAIN EXPENDITURE WHICH ARE REQUIRED TO BE INCURRED TO EN ABLE THE ASSESSEE TO PERFORM ITS OPERATION UNDER THE PRODUCT ION SHARING CONTRACT SUSTAINING ITS ACTIVITIES AND MAINTAINING ITS STANDARD OF OPERATIONS. IT IS IRRELEVANT WHETHER THE JOINT OPER ATOR BOARD HAS ITA NO.6791/DEL./2017 33 APPROVED SUCH EXPENDITURE OR NOT BECAUSE THERE MAY BE SEVERAL OTHER REASONS FOR JOINT-VENTURE PARTNERS TO NOT TO SHARE THE EXPENDITURE. THE LD. ASSESSING OFFICER AS WELL AS T HE LD. DISPUTE RESOLUTION PANEL, DESPITE HAVING THE NECESSARY DETA ILS OF THE EXPENDITURE DID NOT POINT OUT THE SINGLE INSTANCE T HAT THESE EXPENDITURE ARE NOT INCURRED BY THE ASSESSEE FOR TH E PURPOSES OF ITS BUSINESS. MERELY MAKING REFERENCES TO THE VARIO US JUDICIAL PRECEDENTS WITHOUT PUTTING TO THE FACTS ON RECORD A BOUT INCURRING OF THE EXPENDITURE BY THE ASSESSEE OR NON-BUSINESS PURPOSES DISALLOWANCE MADE BY THE LD. AND ASSESSING OFFICER CANNOT BE UPHELD. INSTEAD, DESPITE FULL DETAILS AVAILABLE WIT H THEM THEY HAVE DENIED THE CLAIM TO THE ASSESSEE. NEITHER THE ASSES SING OFFICER AND NOR THE DISPUTE RESOLUTION PANEL POINT OUT NATU RE OF DETAILS WHICH WAS NOT SUBMITTED BY THE ASSESSEE WHEN PART O F THE EXPENDITURE HAS ALREADY BEEN CONSIDERED IN DETAIL A T THE TIME OF DETERMINING ARMS; LENGTH OF THE TRANSACTION. IN VIE W OF NO ADVERSE INFERENCE FROM THE LOWER AUTHORITIES ON THE DETAILS SUBMITTED, WE ARE CONSTRAINED TO ALLOW THE CLAIM OF THE ASSESSEE OF DEDUCTIBILITY OF THE ABOVE EXPENDITURE OF RS. 31 6786095/- . IN THE RESULT GROUND NO. 3 OF THE APPEAL OF THE ASSESS EE IS ALLOWED. 37. KEEPING IN VIEW THE FACT THAT FACTS AND CIRCUMS TANCES OF THE CASE AND THE FACT THAT BUSINESS MODEL HAS NOT UNDER GONE ANY CHANGE SINCE AY 2010-11 AND BY FOLLOWING THE DECISI ON RENDERED BY THE COORDINATE BENCH OF THE TRIBUNAL IN TAXPAYER S OWN CASE FOR AY 2010-11, WE ARE OF THE CONSIDERED VIEW THAT THE COST OF SERVICES AVAILED OF BY THE TAXPAYER REQUIRED BY PSC WITH REGARD TO ITS STANDARD OF OPERATION INCLUDING THE QUALITY OF EXECUTION OF WORK, ACCESS TO LATEST INDUSTRY INFORMATION AND GLOBAL UP DATES, SAFETY OF ITS EMPLOYEES AND THE ENVIRONMENT ETC., CANNOT BE D ISALLOWED MERELY ON THE GROUND THAT THE SAID EXPENSES HAVE NO T BEEN BORNE BY THE JOINT VENTURE PARTNER, PARTICULARLY WHEN IT IS NOT DISPUTED BY THE REVENUE THAT THE EXPENDITURE WERE MADE FOR COMM ERCIAL ITA NO.6791/DEL./2017 34 EXPEDIENCY. SO, WE HEREBY ORDER TO ALLOW THE CLAIM OF THE TAXPAYER FOR DEDUCTION OF THE EXPENSES INCURRED BY THE TAXPA YER. SO, GROUND NO.16 IS DETERMINED IN FAVOUR OF THE TAXPAYER. GROUND NO.17 38. AO/DRP HAVE DISALLOWED AN AMOUNT OF RS.1,54,16, 938/- CLAIMED BY THE TAXPAYER ON ACCOUNT OF INVENTORY WRI TTEN OFF ON THE GROUND THAT CERTAIN INTERNAL DOCUMENTS FURNISHED BY THE TAXPAYER ARE NOT ENOUGH FOR ALLOWING OF THESES EXPENDITURE. THE LD. AR FOR THE TAXPAYER CONTENDED THAT THE EXPENDITURE HAS BEE N CLAIMED AS PER METHOD OF WRITE OFF OBSOLETE INVENTORY IN ACCOR DANCE WITH THE SYSTEM OF ACCOUNTING REGULARLY FOLLOWED AND RELIED UPON NOTE-II OF FINANCIAL STATEMENTS FOR THE YEAR UNDER ASSESSMENT WHEREIN IT IS STATED THAT THE FINANCIAL STATEMENTS HAVE BEEN PREP ARED TO COMPLY WITH ALL MATERIAL ASPECTS WITH ACCOUNTING STANDARD NOTIFIED U/S 211(3C) OF THE COMPANIES (ACCOUNTING STANDARDS) RUL ES, 2006 AS AMENDED AND OTHER RELEVANT PROVISIONS OF THE COMPAN IES ACT, 1956. THE TAXPAYER ALSO RELIED UPON THE SUPPORTING DOCUMENTS PREPARED BY SENIOR DRILLING ENGINEER OF THE COMPANY CERTIFYING THAT SUCH INVENTORY WAS NOT USABLE IN FUTURE AND WA S PRODUCED BEFORE AO AND CONSEQUENTLY CLAIMED DEDUCTION FOR TH E OBSOLETE INVENTORY WRITTEN OFF U/S 37(1) OF THE ACT AND RELI ED UPON THE ITA NO.6791/DEL./2017 35 DECISION RENDERED BY HONBLE BOMBAY HIGH COURT IN C ASE OF ALFA LAVAL INDIA LTD. VS. DCIT 266 ITR 418 (BOM.) , AFFIRMED BY THE HONBLE SUPREME COURT BY JUDGMENT REPORTED IN 295 ITR 451 . THE LD. AR FOR THE TAXPAYER ALSO CONTENDED THAT THE TAXPAYER HAS SUBMITTED AUDIT REPORT OF AN INDEPENDENT AUDITOR PR EPARED ON THE BASIS OF PHYSICAL VERIFICATION AND MAINTENANCE OF I NVENTORY DURING ASSESSMENT PROCEEDINGS AND FURTHER RELIED UPON THE DECISION RENDERED BY COORDINATE BENCH OF THE TRIBUNAL IN GILLETTE INDIA LTD. VS. ACIT 66 TAXMANN.COM 221 . LD. DR FOR THE REVENUE TO REPEL THE ARGUMENTS ADDRESSED BY THE LD. AR FOR THE TAXPA YER RELIED UPON THE ORDERS OF AO/DRP. 39. WHILE DECIDING THE IDENTICAL ISSUE, THE HONBLE BOMBAY HIGH COURT IN CASE CITED AS ALFA LAVAL INDIA LTD. VS. DCIT (SUPRA) HELD AS UNDER :- HELD, (I) THAT THE DULY CERTIFIED AUDITOR'S REPORT PLACED BEFORE THE ASSESSING OFFICER CLEARLY JUSTIFIED VALUATION OF OB SOLETE ITEMS AT 10 PER CENT. OF COST. THERE IS NO DISPUTE THAT THE ASSESSEE IS ENTITLED TO VALUE THE CLOSING STOCK AT MARKET VALUE OR AT COST WHICHEVER IS LOWER. IT IS ALSO NOT IN DISPUTE THAT THE VALUE OF THE CLOSING STOCK HAS BEEN TAKEN AS THE VALUE OF THE OP ENING STOCK IN THE SUBSEQUENT YEAR. MOREOVER, IT IS ALSO NOT DISPU TED THAT THE OBSOLETE ITEMS WERE IN FACT SOLD IN THE SUBSEQUENT YEAR AT A PRICE LESS THAN 10 PER CENT. OF THE COST. IN THE ABSENCE OF ANY BASIS FOR VALUING THE OBSOLETE ITEMS AT 50 PER CENT. OF THE C OST, THE TRIBUNAL COULD NOT HAVE UPHELD THE FINDINGS OF THE ASSESSING OFFICER. 40. HONBLE DELHI HIGH COURT IN CASE CITED AS CIT VS. BHARAT COMMERCE AND INDUSTRIES LTD. 240 ITR 256 (DEL.) HELD THAT, ITA NO.6791/DEL./2017 36 AN ASSESSEE IS FREE TO ADOPT A PARTICULAR METHOD O F VALUATION OF ITS CLOSING STOCK WHICH IT HAS TO FOLLOW REGULARLY FROM YEAR TO YEAR. AT THE SAME TIME IT IS WELL SETTLED THAT IRRESPECTI VE OF THE BASIS ADOPTED FOR VALUATION FOR EARLIER YEARS, THE ASSESS EE HAS AN OPTION TO CHANGE THE METHOD OF VALUATION OF CLOSING STOCK, PROVIDED THE CHANGE IS BONA FIDE AND FOLLOWED REGULARLY THEREAFT ER. 41. IN VIEW OF THE SETTLEMENT PROPOSITION OF LAW DI SCUSSED IN THE PRECEDING PARAS, WE ARE OF THE CONSIDERED VIEW THAT WHEN THE TAXPAYER HAS PREPARED OBSOLETE INVENTORY IN ACCORDA NCE WITH THE SYSTEM OF ACCOUNTING REGULARLY FOLLOWED BY IT IN CO MPLIANCE TO SECTION 211 (3C) OF THE COMPANIES (ACCOUNTING STAND ARDS) RULES, 2006 AS AMENDED AND OTHER RELEVANT PROVISIONS OF TH E COMPANIES ACT, 1956 AND HAS DULY GOT PREPARED AUDITED REPORT OF AN INDEPENDENT AUDITOR ON THE BASIS OF PHYSICAL VERIFI CATION AND IN VIEW OF THE MAINTENANCE OF INVENTORY, THE DISALLOWA NCE MADE BY THE AO/DRP IS NOT SUSTAINABLE IN THE EYES OF LAW. 42. COORDINATE BENCH OF THE TRIBUNAL IN GILLETTE INDIA LTD. VS. ACIT (SUPRA) ALSO WHILE DECIDING THE IDENTICAL ISSUE HEL D IN FAVOUR OF THE ASSESSEE THAT WHEN COMPLETE DETAILS ABOUT TH E INVENTORY WRITTEN OFF HAS BEEN GIVEN SUFFICIENT TO IDENTIFY I TEMS OF INVENTORY TO BE WRITTEN OFF IN THE BOOKS OF ACCOUNT, THE SAME IS REQUIRED TO BE ALLOWED. SO, IN THESE CIRCUMSTANCES, WE ARE OF THE CONSIDERED VIEW ITA NO.6791/DEL./2017 37 THAT THE AO IS DIRECTED TO ALLOW THE AMOUNT OF RS.1 ,54,16,938/- ON ACCOUNT OF INVENTORY WRITTEN OFF AFTER DUE VERIFICA TION IN THE LIGHT OF WHAT HAS BEEN DISCUSSED IN THE PRECEDING PARAS. CO NSEQUENTLY, GROUND NO.17 IS DETERMINED IN FAVOUR OF THE TAXPAYE R. GROUND NO.18 43. AO/DRP HAVE DISALLOWED AN AMOUNT OF RS.48,70,14 ,075/- AND AMOUNT OF RS.3,47,69,091/- ON ACCOUNT OF DEPREC IATION AND DEPLETION RESPECTIVELY BEING THE DIFFERENCE OF DEPR ECIATION/ DEPLETION AMOUNT BETWEEN THE TAX AUDIT REPORT AND T HE COMPUTATION. THE LD. AR FOR THE TAXPAYER CONTENDED THAT THE DIFF ERENCE IN THE ACTUAL COST OF ADDITION IN THE FIXED ASSETS AS PER TAX AUDIT REPORT AND AS PER COMPUTATION OF TOTAL INCOME IS ON ACCOUNT OF ALLOCATION OF INTEREST COST OF RS.23,52,463/- WHICH WAS HIGHLIGHT ED IN THE DEPRECIATION SCHEDULE OF THE REVISED COMPUTATION OF THE TOTAL INCOME SUBMITTED TO THE AO. THE LD. AR FOR THE TAX PAYER FURTHER CONTENDED THAT AS REGARDS THE DIFFERENCE OF DEPRECI ATION OF RS.48,70,14,075/-, IT IS SUBMITTED THAT IN THE PREV IOUS YEARS, THE AMOUNT OF GLOBAL IT & T COST PAID TO BGIL WAS CONSI DERED AS CAPITAL IN NATURE BY THE TAXPAYER AND THE SAME WAS CAPITALIZED AND THE TAXPAYER HAD CLAIMED DEPRECIATION THEREOF BUT T HE TAX AUDITOR REPORT HAS CONSIDERED THIS AS REVENUE IN NATURE, HE NCE DIFFERENCE ITA NO.6791/DEL./2017 38 OCCURRED. IT IS FURTHER CONTENDED BY THE LD. AR TH AT DIFFERENCE IN AMOUNT OF DEPLETION OF RS.3,47,69,091/- IS DUE TO T HE FACT THAT OPENING WDV OF ASSETS AS ON THE 1 ST DAY OF YEAR OF ASSESSMENT ARISES OUT OF ADDITIONS TO FIXED ASSETS AND CONSEQU ENTLY, DEPRECIATION ACCEPTED IN THE EARLIER YEARS BY THE A O WHICH WAS CONSIDERED BY THE AUDITOR AS REVENUE IN NATURE BUT THE TAXPAYER HAS SUO MOTU DISALLOWED THE SAID EXPENSES AND CLAIMED T HE DEPRECIATION IN THE PREVIOUS YEARS. IT IS FURTHER CONTENDED BY LD. AR THAT IDENTICAL ISSUE HAS BEEN DECIDED IN FAVOUR OF THE TAXPAYER IN ITS OWN CASE FOR AY 2010-11 (SUPRA). LD. DR FOR THE REVENUE TO REPEL THE ARGUMENTS ADDRESSED BY THE LD. AR FOR THE TAXPAYER RELIED UPON THE ORDERS OF AO/DRP. 44. COORDINATE BENCH OF THE TRIBUNAL IN AY 2010-11 (SUPRA DECIDED THE IDENTICAL ISSUE IN FAVOUR OF THE TAXPAY ER BY RETURNING FOLLOWING FINDINGS :- 41. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENT ION AND ALSO NOTED THE FACTS THAT BGIL HAS ACQUIRED AND DEVELOPE D CERTAIN IT INFRASTRUCTURE AND SOFTWARE FOR THE BENEFIT OF BG G ROUP OF COMPANIES. SUCH ASSETS INCLUDE PRODUCTION DATA BASE MANAGEMENT SYSTEM, SAP UP GRADATION, EFFICIENT BUDG ETING AND FORECASTING SYSTEMS, FIELD DEVELOPMENT TRAINING PRO GRAMS, GEOSCIENCES/GEOPHYSICS SIMULATIONS, INTEGRATED ASSE T MODELING SYSTEMS, SOPHISTICATED E-MAIL FACILITY ETC. BGIL HA S ALLOCATED THE COST OF THESE ASSETS TO ITS GROUP COMPANIES INCLUDI NG ASSESSEE AT COST BASED IN ALLOCATION METHODOLOGY DECIDED AT THE GROUP LEVEL. ASSESSEE HAS CAPITALIZED THESE COSTS IN THE BOOK OF ACCOUNTS. DURING THE YEAR, BGIL HAD ALLOCATED AN EXPENSE OF R S. 80,13,26,640/- TO THE APPELLANT OUT OF WHICH RS. 66 ,61,30,450/- HAD BEEN CAPITALIZED AND BALANCE WAS ACCOUNTED AS W ORK IN PROGRESS. THE APPELLANT HAD CLAIMED DEPRECIATION OF RS. ITA NO.6791/DEL./2017 39 3,30,05,676/- ON THE IT INFRASTRUCTURE AND SOFTWARE . THE LD. DISPUTE RESOLUTION PANEL HAS STATED THAT EVEN THE B ENEFICIAL OWNERSHIP OF THE ASSENT ALSO ENTITLES THE ASSESSEE TO CLAIM THE DEPRECIATION IF THE TEST OF USER IS PROVED. IN THE PRESENT CASE, WE DO NOT THINK THAT THERE IS ANY DOUBT ABOUT THE OWNE RSHIP OF THE IT INFRASTRUCTURE IN QUESTION AS PER PARAGRAPH NO. 11. 1 OF THE DIRECTION OF THE LD. DISPUTE RESOLUTION PANEL. THER EFORE ONLY ISSUE NOW REMAINS IS TO BE SEEN WHETHER THE ASSESSE E HAS PROPERLY DEMONSTRATED BEFORE THE LD. ASSESSING OFFI CER THAT THE ASSESSEE HAS USED THE ASSETS FOR THE PURPOSES OF TH E BUSINESS. IT IS BETTER TO LOOK AT WHAT KIND OF ASSETS THE ASSESSEE ARE OWNED BY AND USED BY IT. ASSETS ARE PRODUCTION DATABASE MANA GEMENT SYSTEM, SAP UP GRADATION, BUDGETING AND FORECASTING SYSTEM, TRAINING PROGRAMS, SIMULATIONS SOFTWARE, ASSET MODE LING SYSTEMS AND EMAIL FACILITIES. WHEN THE ASSESSEE IS PARTICIP ATING IN SUCH A HUGE PRODUCTION SHARING CONTRACT, IT IS TOO NAVE T O THINK THAT PRODUCTION DATABASE MANAGEMENT SYSTEM AND SAP, TRAI NING PROGRAMS, SIMULATIONS PROGRAMME AND EMAIL FACILITIE S HAVE NOT BEEN USED BY THE ASSESSEE. ISSUES HAVE ALSO BEEN EX AMINED AT THE TIME OF DETERMINING ARMS LENGTH PRICE OF THESE EXP ENSE. THE ACTUAL COST OF THESE ASSETS ARE NOT DOUBTED BY THE LD. ASSESSING OFFICER. IN VIEW OF THIS WE ARE OF THE OPINION THAT THESE ASSETS ARE BENEFICIALLY OWNED BY THE ASSESSEE AND ARE USED FOR THE PURPOSES OF THE BUSINESS OF THE ASSESSEE, THEREFORE ENTITLES ASSESSEE TO CLAIM THE DEPRECIATION ON THESE ASSETS. IN VIEW OF THIS GROUND NO. 5 OF THE APPEAL OF THE ASSESSEE IS ALLOWED. 45. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE AND FO LLOWING THE DECISION RENDERED BY THE COORDINATE BENCH OF THE TR IBUNAL IN TAXPAYERS OWN CASE FOR AY 2010-11 (SUPRA), WE ARE OF THE CONSIDERED VIEW THAT WHEN THE TAXPAYER HAS DULY EXP LAINED THAT THE DIFFERENCE OF DEPRECIATION OF RS.48,70,14,075/- IS DUE TO THE FACT THAT IN PREVIOUS YEAR, THE AMOUNT OF GLOBAL IT&T CO ST PAID TO BGIL WAS CONSIDERED AS CAPITAL IN NATURE BY THE TAX PAYER AND THE SAME WAS CAPITALIZED ON WHICH TAXPAYER HAD CLAIMED DEPRECIATION, BUT TAX AUDITOR REPORT HAS CONSIDERED THIS AS REVEN UE IN NATURE, NO ITA NO.6791/DEL./2017 40 DISALLOWANCE CAN BE MADE ON ACCOUNT HOWEVER SUBJECT TO THE VERIFICATION BY THE AO. 46. SO FAR AS QUESTION OF AMOUNT OF DIFFERENCE OF D EPLETION OF RS.3,47,69,091/- IS CONCERNED, THE HONBLE BOMBAY H IGH COURT IN CASE OF MELMOULD CORPORATION VS. CIT 202 ITR 789 DECIDED THE IDENTICAL ISSUE BY RETURNING FOLLOWING FINDINGS :- 'THUS, THE VALUE OF THE CLOSING STOCK OF THE PRECED ING YEAR MUST BE THE VALUE OF THE OPENING STOCK OF THE NEXT YEAR. THE CHANGE THEREFORE, HAS TO BE EFFECTED BY ADOPTING THE NEW M ETHOD FOR VALUING THE .CLOSING STOCK WHICH WILL, IN ITS TURN, BECOME THE VALUE OF THE OPENING STOCK OF THE NEXT YEAR. IF INS TEAD, A PROCEDURE IS ADOPTED FOR CHANGING THE VALUE OF THE OPENING STOCK, IT WILL LEAD TO A CHAIN REACTION OF CHANGES IN THE SENSE THAT THE CLOSING VALUE OF STOCK OF THE YEAR PRECEDING WILL A LSO HAVE TO CHANGE AND CORRESPONDINGLY THE VALUE OF THE OPENING STOCK OF THAT YEAR AND SO ON. ' 47. SO, FOLLOWING THE DECISION RENDERED BY HONBLE BOMBAY HIGH COURT IN MELMOULD CORPORATION VS. CIT (SUPRA), AO IS DIRECTED TO ACCEPT THE OPENING WDV OF ASSETS FURNIS HED BY THE TAXPAYER IN THE SCHEDULE FOR COMPUTATION OF INCOME ARRIVED FROM THE CLOSING WDV OF FIXED ASSETS OF PREVIOUS YEAR AN D AFTER DUE VERIFICATION TO DELETE THE DISALLOWANCE IN ACCORDAN CE WITH THE COMPUTATION AND INCOME AND TAX AUDIT REPORT. CONSE QUENTLY, GROUND NO.18 IS DECIDED IN FAVOUR OF THE TAXPAYER. ITA NO.6791/DEL./2017 41 GROUND NO.19 48. AO/DRP HAVE FURTHER DISALLOWED ADDITIONAL DEPRE CIATION OF RS.88,90,051/- ON NEW PLANT AND MACHINERY OF RS.4,4 4,50,253/- PURCHASED BY THE TAXPAYER PUT TO USE DURING THE YEA R UNDER ASSESSMENT CLAIMED BY THE TAXPAYER DURING THE COURS E OF ASSESSMENT PROCEEDINGS. 49. LD. AR FOR THE TAXPAYER CONTENDED THAT AS PER S ECTION 32 (1)(IIA) OF THE ACT IN CASE OF NEW PLANT AND MACHIN ERY ACQUIRED AND INSTALLED BY THE TAXPAYER ENGAGED IN THE BUSINESS O F MANUFACTURE OR PRODUCTION OF ANY ARTICLE OR THING, A SUM EQUAL TO 20% OF THE ACTUAL COST OF SUCH MACHINERY OR PLANT IS ALLOWABLE AS DED UCTION IN ADDITION TO THE NORMAL DEPRECIATION AND FURTHER CON TENDED THAT THE PROCESS OF EXPLORATION AND PRODUCTION OF OIL AND GA S COMPRISES OF EXTRACTION AND SEPARATION AND SEPARATION BRINGS INT O EXISTENCE NEW AND DISTINCT ARTICLE AND IT AMOUNTS OF MANUFACTURIN G. 50. IT IS ALSO THE CASE OF THE TAXPAYER THAT IN ORD ER TO EXPLAIN THE ADDITIONAL DEDUCTION CLAIMED COMPREHENSIVE SUBMISSI ON DATED 29.01.2016 WERE FILED BEFORE THE AO WHO HAS MERELY DECLINED THE CLAIM ON THE GROUND THAT THE ADDITIONAL CLAIM CAN O NLY BE MADE BY WAY OF REVISED RETURN OF INCOME. WE ARE OF THE CON SIDERED VIEW THAT AO IS REQUIRED TO DECIDE THE CLAIM IN VIEW OF THE PROVISIONS CONTAINED U/S 32(1)(IIA) OF THE ACT IN THE LIGHT OF THE DECISION ITA NO.6791/DEL./2017 42 RENDERED BY HONBLE SUPREME COURT AND HONBLE HIGH COURTS IN CIT VS. HINDUSTAN PETROLEUM CORP. LTD. 396 ITR 69 6 (SC), HLS INDIA LTD. 355 ITR 292 (DEL.), CIT VS. SESA G OA LTD. 271 ITR 331 (SC), ALUMINUM CORPORATION OF INDIA LTD. VS . COAL BOARD AIR 1959 CAL. 222 AND CIT VS. MERCANTILE CO NSTRUCTION CO. (1994) 74 TAXMAN 41 (CAL. HC) ON MERITS AFTER PROVIDING AN OPPORTUNITY OF BEING HEARD TO THE TAXPAYER. CONSEQ UENTLY, GROUND NO.19 IS DETERMINED IN FAVOUR OF THE TAXPAYER FOR S TATISTICAL PURPOSES. GROUND NO.20 51. AO/DRP HAVE DISALLOWED INTEREST OF RS.2,31,62,1 45/- ON THE GROUND THAT THE SAME HAS NOT BEEN CLAIMED AS DEDUCT ION. UNDISPUTEDLY, THE TAXPAYER HAS NOT CLAIMED THE INTE REST AMOUNT OF RS.2,31,62,145/- WHILE COMPUTING ITS PROFIT FOR THE YEAR UNDER ASSESSMENT AND CONSEQUENTLY, DISALLOWED BY THE AO/D RP BEING EXCESS INTEREST CLAIM OF CAPITAL NATURE. 52. THE LD. AR FOR THE TAXPAYER CONTENDED THAT SINC E THE TAXPAYER HAS ALREADY MADE A DISALLOWANCE OF RS.2,31 ,62,145/- IN ITS COMPUTATION OF INCOME, THE ADDITION THEREOF MADE BY THE AO IS NOT SUSTAINABLE. HOWEVER, WE ARE OF THE CONSIDERED VIE W THAT SINCE THE AMOUNT HAS NOT BEEN CLAIMED BY THE TAXPAYER WHILE C OMPUTING ITS ITA NO.6791/DEL./2017 43 PROFIT IN THE YEAR UNDER ASSESSMENT, THE ISSUE IS R EQUIRED TO BE SENT BACK TO THE AO FOR VERIFICATION AND TO DECIDE ACCOR DINGLY AFTER PROVIDING AN OPPORTUNITY OF BEING HEARD TO THE TAXP AYER. CONSEQUENTLY GROUND NO.21 IS DETERMINED IN FAVOUR O F THE TAXPAYER FOR STATISTICAL PURPOSES. GROUND NO.21 53. AO/DRP HAVE MADE ADDITION OF RS.63,65,958/- ON ACCOUNT OF DIFFERENCE IN REVENUE AS PER FORM 26AS AND PROFI T & LOSS ACCOUNT. IT IS CONTENDED BY LD. AR FOR THE TAXPAYE R THAT THE DIFFERENCE OF RS.63,65,958/- WAS ON ACCOUNT OF DIFF ERENCE IN FOREIGN EXCHANGE RATE WHICH IS TO BE GOVERNED BY TH E TERMS OF PSC AND RELIED ON PARA 15.3.2 OF ARTICLE 15 TAXES, RO YALTIES, RENTALS, ETC. OF THE PSC FOR MID AND SOUTH TAPTI FIELD AND T HE REVENUE FROM PETROLEUM OPERATIONS SHALL BE DETERMINED IN AC CORDANCE WITH ARTICLE 19 OF THE PSC. FOR READY PERUSAL, RELEVANT ARTICLE OF PSC IS EXTRACTED AS UNDER :- THE REVENUE FROM THE BUSINESS CONSISTING OF PETRO LEUM OPERATIONS SHALL BE DETERMINED IN ACCORDANCE WITH A RTICLE 19 FOR ITS PARTICIPATING INTEREST SHARE OF CRUDE OIL SAVED AND SOLD, OR OTHERWISE DISPOSED OF, FROM EACH FIELD.' 'ARTICLE 19 - VALUATION OF OIL' PRESCRIBES FOR VALU ATION OF SALE OF CRUDE OIL FOR WHICH THE ACCOUNTING TREATMENT OF CUR RENCY FLUCTUATION IS PROVIDED UNDER 'ARTICLE 20 - CURRENC Y AND EXCHANGE CONTROL PROVISIONS' OF THE AFORESAID PSC. PARA 20.2 IN ARTICLE 20 OF THE AFORESAID THE PSC PR OVIDES THAT FOR ACCOUNTING OF PURCHASE AND SALE OF CURRENCY BY THE CONTRACTOR, ITA NO.6791/DEL./2017 44 THE RATES AS SPECIFIED IN SECTION 1.6 OF APPENDIX C - ACCOUNTING PROCEDURE' SHALL APPLY. THE RELEVANT EXTRACT OF THE AFORESAID ARTICLE OF PSC HAS BEEN REPRODUCED FOR YOUR READY R EFERENCE: 'THE RATES OF EXCHANGE FOR THE PURCHASE AND SALE OF CURRENCY BY THE CONTRACTOR SHALL BE THE PREVAILING RATES OF GENERAL APPLICATION DETERMINED BY THE STATE BANK OF INDIA OR SUCH OTHER FINANCIAL BODY AS MAY BE MUTUALLY AGR EED BY THE PARTIES AND IN ACCORDANCE WITH PREVAILING CU RRENCY AND EXCHANGE REGULATIONS AND, FOR ACCOUNTING PURPOS ES UNDER THIS CONTRACT, THESE RATES SHALL APPLY AS PRO VIDED IN SECTION 1.6 OF APPENDIX C.' AS PER THE PARA 1.6.1 IN 'ACCOUNTING PROCEDURE - SE CTION L' OF THE AFORESAID MENTIONED PSC, THE APPELLANT IS REQUIRED TO CONSIDER PREVIOUS MONTH'S AVERAGE OF THE DAILY MEANS OF THE BUY AND SELLING RATES OF EXCHANGE AS QUOTED BY THE STATE BA NK OF INDIA OR ANY OTHER FINANCIAL BODY AS MAY BE MUTUALLY AGREED. THE RELEVANT EXTRACT OF THE AFORESAID ARTICLE IS REPROD UCED FOR YOUR READY REFERENCE: 'FOR TRANSLATION PURPOSES BETWEEN UNITED STATES DOL LARS AND INDIAN RUPEES OR ANY OTHER CURRENCY, THE PREVIO US MONTH'S AVERAGE OF THE DAILY MEANS OF THE BUYING AN D SELLING RATES OF EXCHANGE AS QUOTED BY THE STATE BA NK OF INDIA (OR ANY OTHER FINANCIAL BODY AS MAY BE MUTUAL LY AGREED BETWEEN THE PARTIES) SHALL BE USED FOR THE M ONTH IN WHICH THE REVENUES, COSTS, EXPENDITURES, RECEIPTS O R INCOME ARE RECORDED. HOWEVER, IN THE CASE OF ANY SI NGLE NON-US DOLLAR TRANSACTION IN EXCESS OF THE EQUIVALE NT OF ONE HUNDRED THOUSAND US DOLLARS (US$ 100,000), THE CONVERSION INTO US DOLLARS SHALL BE PERFORMED ON TH E BASIS OF THE AVERAGE OF THE APPLICABLE EXCHANGE RAT ES FOR THE DAY ON WHICH THE TRANSACTION OCCURRED.' 54. WHEN THE TAXPAYER HAS BOOKED EXCESS REVENUE IN ACCORDANCE WITH THE RULE 115 OF THE INCOME-TAX RULES, 1962 (FO R SHORT THE RULES), ACCOUNTING AS PER PSC WOULD OBLIGE THE TAX PAYER TO REVERSE THE EXCESS REVENUE AND CONSIDER IT AS FOREI GN EXCHANGE LOSS. THE TAXPAYER RELIED UPON THE DECISION RENDERED BY H ONBLE SUPREME COURT IN CIT VS. ENRON OIL & GAS LIMITED 305 ITR 75 . ITA NO.6791/DEL./2017 45 55. HONBLE APEX COURT IN CIT VS. ENRON OIL & GAS LIMITED (SUPRA) WHILE DECIDING THE IDENTICAL ISSUE HELD THA T, SECTION 42 IS A COMPLETE CODE BY ITSELF FOR DEDUCTION IN CASE OF BU SINESS OF PROSPECTING THE EXTRACTION OR PRODUCTION OF MINERAL OILS. THE SECTION IS INOPERATIVE BY ITSELF AND BECOMES OPERAT IVE ONLY WHEN IT IS READ WITH THE PRODUCTION SHARING CONTRACT. THE S ECTION WAS ENACTED TO ENSURE THAT WHERE THE STRUCTURE OF THE P RODUCTION SHARING CONTRACT IS AT VARIANCE WITH ACCOUNTING PRI NCIPLES GENERALLY USED FOR ASCERTAINING TAXABLE INCOME, THE PROVISIONS OF THE PRODUCTION SHARING CONTRACT WOULD PREVAIL. 56. HONBLE COURT FURTHER HELD THAT IN CASE OF PROD UCTION SHARING CONTRACT, AN INDEPENDENT ACCOUNTING REGIME IS APPLI CABLE AND FOREIGN EXCHANGE LOSSES ON ACCOUNT OF FOREIGN CURRE NCY TRANSLATION IS AN ALLOWABLE DEDUCTION. SO, IN VIEW OF THE LAW LAID DOWN BY THE HONBLE APEX COURT IN CASE OF CIT VS. ENRON OIL & GAS LIMITED (SUPRA), WE ARE OF THE CONSIDERED VIEW THAT THE INC OME EARNED BY THE TAXPAYER IN FOREIGN CURRENCY PURSUANT TO THE PS C ENTERED INTO WITH GOVERNMENT OF INDIA IS GOVERNED BY THE AGREEME NT OF PSC AND THE FOREIGN EXCHANGE LOSSES ON ACCOUNT OF FOREI GN CURRENCY TRANSLATION IS AN ALLOWABLE DEDUCTION WHILE COMPUTI NG THE TOTAL INCOME OF THE TAXPAYER. IN SUCH CIRCUMSTANCES, PRO VISIONS OF PSC ARE TO BE APPLIED AND THE DISALLOWANCE MADE BY AO/D RP ON ITA NO.6791/DEL./2017 46 ACCOUNT OF DIFFERENCE IN REVENUE IS NOT SUSTAINABLE , HENCE ALLOWABLE SUBJECT TO VERIFICATION BY THE AO. SO, GROUND NO.2 1 IS DETERMINED IN FAVOUR OF THE TAXPAYER FOR STATISTICAL PURPOSES. GROUND NO.22 57. GROUND NO.22 IS DISMISSED HAVING NOT BEEN PRESS ED DURING THE COURSE OF ARGUMENTS. GROUND NO.23 58. AO HAS NOT GRANTED CREDIT OF TAX DEDUCTED AT SO URCE TO THE TUNE OF RS.33,53,88,297/- STATED TO HAVE BEEN DEPOS ITED BY THE TAXPAYER. AO IS DIRECTED TO GRANT THE CREDIT OF TH E TDS CLAIMED BY THE TAXPAYER SUBJECT TO VERIFICATION. ACCORDINGLY, GROUND NO.23 IS DETERMINED IN FAVOUR OF THE TAXPAYER. GROUND NO.24 59. AO CHARGED THE INTEREST TO THE TAXPAYER U/S 234 B. THE LD. AR FOR THE TAXPAYER CONTENDED THAT THE INTEREST U/S 234B IS NOT CHARGEABLE TO TAXPAYER IT BEING A NON-RESIDENT WHOS E INCOME IS SUBJECT TO TAX DEDUCTION AT SOURCE AND FURTHER CONT ENDED THAT THIS ISSUE HAS ALREADY BEEN DETERMINED IN FAVOUR OF THE TAXPAYER IN ITS OWN CASE FOR AY 2010-11 (SUPRA). COORDINATE BENCH OF THE TRIBUNAL BY RELYING UPON THE DECISIONS RENDERED BY HONBLE ITA NO.6791/DEL./2017 47 UTTARAKHAND HIGH COURT IN CASE OF CIT VS. MAERSK COMPANY LIMITED 334 ITR 79 AND HONBLE DELHI HIGH COURT IN CASE OF DIT VS. GE PACKAGED POWER INCORPORATION 373 ITR 6 5 DIRECTED THE AO NOT TO CHARGE THE INTEREST U/S 234B OF THE A CT ON THE INCOME OF THE TAXPAYER WHICH IS LIABLE TO TAX DEDUCTION AT SOURCE BY RETURNING FOLLOWING FINDINGS :- 61. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENT IONS AND ALSO PERUSED THE RELEVANT JUDICIAL PRECEDENTS CITED BEFO RE US. IN THE DECISION CITED BY THE LD. AUTHORISED REPRESENTATIVE IN CASE OF CIT VERSUS GE PACKAGED POWER INCORPORATION (373 ITR 65) IN PARA NO. 19, THE HONBLE HIGH COURT HAS CONSIDERED THE DECISION CITED BY THE LD. DEPARTMENTAL REPRESENTATIVE AS UND ER:- 19. ALCATEL LUCENT USA INC (SUPRA), IN ANY EVENT, CAN BE DISTINGUISHED ON THE GROUND THAT THE COURT WAS PERS UADED TO CONFIRM THE LEVY OF INTEREST UNDER SECTION 234B, ONLY ON ACCOUNT OF THE EQUITIES THAT NEEDED TO BE BALANC ED IN THOSE PECULIAR FACTS, IN FAVOUR OF TAXABILITY. THIS IS EVIDENT FROM THE FOLLOWING WORDS OF THE COURT: '26. IT FURTHER SEEMS TO US INEQUITABLE THAT THE AS SESSEE, WHO ACCEPTED THE TAX LIABILITY AFTER INITIALLY DENY ING IT, SHOULD BE PERMITTED TO SHIFT THE RESPONSIBILITY TO THE INDIAN PAYERS FOR NOT DEDUCTING THE TAX AT SOURCE F ROM THE REMITTANCES, AFTER LEADING THEM TO BELIEVE THAT NO TAX WAS DEDUCTIBLE. THE ASSESSEE MUST TAKE RESPONSIBILITY F OR ITS VOLTE FACE. ONCE LIABILITY TO TAX IS ACCEPTED, ALL CONSEQUENCES FOLLOW; THEY CANNOT BE AVOIDED. AFTER HAVING ACCEPTED THE LIABILITY TO TAX AT THE FIRST A PPELLATE STAGE, IT IS UNFAIR ON THE PART OF THE ASSESSEE TO INVOKE SECTION 201 AND POINT FINGERS AT THE INDIAN PAYERS. THE ARGUMENT ADVANCED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE INDIAN PAYERS FAILED TO DEDUCT TA X AT THEIR OWN RISK SEEMS TO US TO BE ONLY AN ARGUMENT O F CONVENIENCE OR DESPAIR. AS WE HAVE POINTED OUT EARL IER, IT IS DIFFICULT TO IMAGINE THAT THE INDIAN TELECOM EQU IPMENT DEALERS OF THE ASSESSEE WOULD HAVE FAILED TO DEDUCT TAX AT SOURCE EXCEPT ON BEING PROMPTED BY THE ASSESSEE. IT MAY BE TRUE THAT THE GENERAL RULE IS THAT EQUITY HAS NO PLACE IN THE INTERPRETATION OF TAX LAWS. BUT WE ARE OF THE V IEW THAT WHEN THE FACTS OF A PARTICULAR CASE JUSTIFY IT, IT IS OPEN TO ITA NO.6791/DEL./2017 48 THE COURT TO INVOKE THE PRINCIPLES OF EQUITY EVEN I N THE INTERPRETATION OF TAX LAWS. TAX LAWS AND EQUITY NEE D NOT BE SWORN ENEMIES AT ALL TIMES. THE RULE OF STRICT INTERPRETATION MAY BE RELAXED WHERE MISCHIEF CAN RE SULT BECAUSE OF THE INCONSISTENT OR CONTRADICTORY STANDS TAKEN BY THE ASSESSEE OR EVEN THE REVENUE. MOREOVER, INTE REST IS, INTER ALIA, COMPENSATION FOR THE USE OF THE MONEY. THE ASSESSEE HAS HAD THE USE OF THE MONEY, WHICH WOULD OTHERWISE HAVE BEEN PAID AS ADVANCE TAX, UNTIL IT A CCEPTED THE ASSESSMENTS AT THE FIRST APPELLATE STAGE. WHERE THE REVENUE HAS BEEN DEPRIVED OF THE USE OF THE MONIES AND THEREBY PUT TO LOSS FOR NO FAULT ON ITS PART AND WH ERE THE LOSS AROSE AS A RESULT OF VACILLATING STANDS TAKEN BY THE ASSESSEE, IT IS NOT EXPECTED OF THE ASSESSEE TO SHI FT THE RESPONSIBILITY TO THE INDIAN PAYERS. WE ARE NOT TO BE UNDERSTOOD AS PASSING A VALUE-JUDGMENT ON THE ASSES SEE'S CONDUCT. WE ARE ONLY SAYING THAT THE ASSESSEE SHOUL D TAKE RESPONSIBILITY FOR ITS ACTIONS.' [EMPHASIS ADDED] T HIS COURT FINDS THAT NO NEED IS MADE OUT IN THESE FACTS TO BALANCE ANY EQUITIES IN THESE FACTS, AS THE ASSESSE E HAS NOT VACILLATED IN ITS STAND AS TO THE EXISTENCE OF A PE IN INDIA OR OTHERWISE. IN ANY EVENT, AS OBSERVED EARLI ER, THE POSITION OF LAW ITSELF REQUIRES THAT THE TAX BE DED UCTED AT SOURCE, WHATEVER MAY BE THE ASSESSEE'S STANCE, FAIL ING WHICH THE PAYER IS TREATED AS AN ASSESSEE-IN-DEFAUL T UNDER SECTION 201, AND THE PAYEE IS REQUIRED TO DISCHARGE ITS LIABILITY TO PAY THE TAX THAT WAS NOT DEDUCTED UNDE R SECTION 191. [EXTRACTED FROM TAXMANN.COM] 62. WE ARE AWARE THAT HONBLE SUPREME COURT HAS GRA NTED SLP AGAINST HIGH COURT'S RULING THAT WHERE ASSESSEE WAS NON- RESIDENT COMPANY, ENTIRE TAX WAS TO BE DEDUCTED AT SOURCE ON PAYMENTS MADE BY PAYER TO IT AND THERE WAS NO QUEST ION OF PAYMENT OF ADVANCE TAX BY ASSESSEE; THEREFORE, REVE NUE COULD NOT CHARGE ANY INTEREST UNDER SECTION 234B FROM ASSESSE E, WHICH IS PENDING FOR ADJUDICATION. HOWEVER THE DECISION OF T HE HON HIGH COURT IS TO BE FOLLOWED BY US , IF THE SAME IS NOT STAYED BY THE HON SUPREME COURT, THEREFORE RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE HIGH COURT WE DIRECT THE LD. ASSESSING OFFICER TO NOT TO CHARGE INTEREST UNDER SECTION 234B OF THE ACT ON THE INCOME OF THE ASSESSEE WHICH IS SUBJECT TO OR LIABLE TO TAX D EDUCTION AT SOURCE. IN VIEW OF THIS WE SET ASIDE GROUND NO. 9 O F THE APPEAL OF THE ASSESSEE BACK TO THE FILE OF THE LD. ASSESSING OFFICER TO RECOMPUTE THE INTEREST UNDER SECTION 234B OF THE AC T ACCORDINGLY. ITA NO.6791/DEL./2017 49 60. FOLLOWING THE ORDER PASSED BY THE COORDINATE BE NCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2010-11 WHIC H IS ON THE BASIS OF DECISION RENDERED BY HONBLE UTTARAKHAND H IGH COURT IN CASE OF CIT VS. MAERSK COMPANY LIMITED (SUPRA) AND HONBLE DELHI HIGH COURT IN CASE OF DIT VS. GE PACKAGED POWER INCORPORATION (SUPRA), WE ARE OF THE CONSIDERED VIEW THAT THE TAXPAYER CANNOT BE CHARGED TO TAX U/S 234B ON THE I NCOME EARNED WHICH IS OTHERWISE SUBJECT TO TAX DEDUCTED AT SOURC E. SO, WE HEREBY DIRECT THE AO TO RECOMPUTE THE INTEREST U/S 234B ACCORDINGLY. SO, GROUND NO.24 IS DETERMINED IN FAV OUR OF THE TAXPAYER. GROUND NO.25 61. GROUND NO.25 IS GENERAL IN NATURE, HENCE DOES N OT REQUIRE ANY ADJUDICATION. 62. RESULTANTLY, THE APPEAL FILED BY THE TAXPAYER I S PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 17 TH DAY OF JULY, 2018. SD/- SD/- (R.K. PANDA) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 17 TH DAY OF JULY, 2018 TS ITA NO.6791/DEL./2017 50 COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.